Monday, April 5, 2010

Exercising Your Freedom of Choice Around Retirement Income and Taxes

Exercising Your Freedom of Choice Around Retirement Income and Taxes

Did you know that the U.S. tax code gives you ABSOLUTE AND COMPLETE CHOICE AND CONTROL over how YOUR tax dollars are allocated? By that, I mean that Uncle Sam initially gives all of us the opportunity to decide how to allocate our payable income taxes. Then, once we are done exercising that choice, OR if we decide to waive that control, we must turn over those dollars to the Department of the Treasury, at which point we completely lose any say over how those funds are used.

Sadly and unfortunately, the majority of taxpayers fall into the latter category – relinquishing their choice and control – either due to ignorance and/or poor financial advice. This is one of the little understood concepts in the field of personal finance, but I am confident that you’ll grasp the concept after reading this post.

First, though, let me be crystal clear that I am in no way, shape, or form joining the – in my view – completely misinformed school of thought that perpetuates the idea that there is no federal law requiring Americans to pay income taxes. That is simply not true! Section 1 of Title 26 (otherwise known as the Internal Revenue Code or Tax Code) REQUIRES Americans to pay federal income taxes. If you are not convinced, ask Wesley Snipes.

Meet Peggy

Let me illustrate this exercising of choice and control with the story of Peggy, one of our clients. I have this fireball of a lady’s permission to give you a glimpse of what I believe is preventing millions from enjoying their retirements.

Peggy finally began to realize that after all these years, the advice she’d been following from her so-called financial advisor/CPA landed her exactly where she did not want to be – with an increased income tax liability that was worsening each year. At precisely the same time, she seemed to be losing control over when she could withdraw her own money.

Peggy had been led to believe that since her income would potentially be lower in retirement, her taxes would be lower, too. It took her, in her own words, “less than 10 minutes to find the cure to [her] tax woes.” After reading one of my books – 5 Mistakes Your Financial Advisor Is Making Peggy realized that her income had certainly been reduced in retirement, but her taxes had remained about the same as the pre-retirement level. The reason? Under the direction of her genius financial advisor and CPA – did I say genius? – she had eliminated the options that reduced her taxable income.

Peggy had sold her house in order to move back to her hometown and buy a very nice condo to enjoy all her years of hard work. She’d had a $250,000 IRA that she intended to leave to her only child, but she suddenly noticed that in addition to her already huge yearly income tax bill, she would be forced to take the IRS-mandated RMD (required minimum distribution) that comes with turning age 70½.

Her Financial Advisor/CPA’s Solution?

Take the $400,000 from the sale of her home to pay cash for her new condo, take the RMD since she really had “no choice,” and reinvest the yearly after-tax funds in a different account.

My Solution for Peggy

Put only 20 percent ($80,000) down on her new condo and take a mortgage for $320,000, which we found at 6 percent interest ($1,600 per month, or $19,200 per year). Peggy would then withdraw $19,200 each year from her $250,000 IRA to make her mortgage payments.

Here is the choice part: Peggy has a $19,200 yearly income, but also a $19,200 yearly deductible mortgage interest payment on her Schedule A Form, meaning she’s got a zero taxable income. Yes! Just like that, she has exercised her choice and control by mortgaging her condo.

Remember the $320,000 she was going to use to buy the condo for cash? If she could gain a return of more than 4.2 percent per annum (which is the true cost of her 6 percent mortgage at her combined 30 percent federal and state marginal tax bracket), she would turn a profit.

Peggy would now place her investment in a non-qualified vehicle – one whose withdrawal schedule cannot be dictated by the IRS because it’s completely income-tax free. If that is yielding her just 6 percent interest, her account would accrue $573,071 in 10 years. If she then CHOSE to eliminate her mortgage and give those dollars to the treasury via another path, she’d have made an income-tax free gain of $253,071.

You Don’t Know What You Don’t Know

That old axiom is true: You just don’t know what you don’t know – and what you don’t know really matters. Peggy’s so-called advisors stuck her with no flexibility and a decision that could have continued to cost her thousands of dollars each year. Remember, you do have a choice, and sometimes it pays quite handsomely to think outside the box.

For your free consultation and advice about how to make the best choice for your financial situation, call Laser Financial Group today at 301-949-4449 or visit us on the Web.


  1. You just dont know what you dont know is so true. I myself was clueless about tax and tax Laws until I affiliated myself with Mr Samuel Asare, Glad to say I dont have much money and I am a single mom but now I feel safe and secure about me and my son's Future with redirecting my finances and now saving just a little which to my surprise is an harvest I never dreamed of.Now back to the point at hand, I was able to take control of my work earnings, exempted myself from tax, which is legal and is in the position to do, now I can take home more money and enjoy my earnings.I shared this with several co-workers and they refuse to beleive we can do this and that they are bound to pay taxes only one way, I just just dont know what you dont know!!! Sam thanks for your highlights and I look forward to reading more of your blogs.

  2. Thank you! for reading our blog and for your comments. I am glad we were able to assist you in moving towards your goals.


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