The QRP is basically another type of government retirement plan
with greater options to choose the type of investments you want to make and allows for contributions up to $51000 a year.
I think it’s great for individuals who already have money locked up in IRA’s and old 401k’s and
would like to be able to invest in assets away from the traditional Wall Street
recommended mutual fund/stock market roller coaster.
That said, a QRP is still government retirement account with
rules and restrictions regarding how much can be put in, borrowed out($50k max
loan) and paid back (within 5 years). Like all qualified retirement plans, the
benefit of a tax deduction and tax-deferred growth is given a lot of
mention. Using different words that mean the same thing, I would call it
a “tax postponed” retirement account because that’s what tax-deferred
means. The only way to be free from govt handcuffs around this money is
to pay income tax as it is earned. We are still at historically low tax
brackets. Why take a tax deduction now if you believe tax brackets will
increase while at the same time postponing your income taxes to a later date at
an unspecified rate? It’s like buying a house today and asking the
realtor to let you know what it cost you in 20 years. Same thinking
applies with a QRP. I do think it’s better than a traditional IRA and
401k but a QRP still ties the owner of the it to the government and future
taxes at the highest income tax level they’ll be in when they to take
distribution (or transfer the account upon death).
A Roth QRP is a better way to go because it is after tax money
and proceeds will be tax free. The downfall is the government can change
the rules on these plans (same with a tax-deferred QRP) at anytime and you
still have limitations on loan amounts and loan repayments.
Revenue starved, insolvent governments (like the U.S.
Government) can and do make changes to these plans as they see fit. My
guess is that they will put a cap on the amount that can grow tax-free in these
accounts. It’s already being talked about (see this article: http://www.heritage.org/research/reports/2013/05/obama-s-cap-on-defined-contribution-retirement-savings-plans
).
In summary, a private non-qualified vehicle like Bank On
Yourself is the best way to go. Bank On Yourself is not subject to annual
contribution limits, or limited borrowing capacity & restrictive loan
repayment schedules, access is granted anytime for any reason on a tax-favored
basis with a policy loan, Bank On Yourself allows uninterrupted growth even
when cash values are used elsewhere, and ultimately it will transfer an income
tax-free death benefit to the beneficiaries over and above the existing cash
values. No other assets does this and accelerates in value upon
death. It’s the most versatile financial tool available to use for any
type of investing including real estate.
A side note about real estate. The IRS tax code already
allows real estate equity to be exchanged tax free via 1031 exchanges.
Rental income is taxable but it’s minimized with depreciation and deductions
related to maintaining the property. Any distribution that comes from a
QRP will be taxed as ordinary income which is the highest tax a person will pay
so taxes will be paid one way or another. It’s only irrelevant if you
think taxes will be lower in the future. If so, postpone for as long as
possible… just don’t hold breath waiting for tax brackets to get any
lower.
I’d prefer to play it safe. Keep my money as far away from
government involvement and restrictions as well as guaranteed future tax
obligations via the income tax and unknown future tax code.
JLM Wealth Strategies, Inc.
(925) 386-6639 Office
Bank On Yourself™ Authorized
Advisor
IBC Practitioner
CA Life#0C42222
DRE #01390017
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