I hate to bring up the nasty subject of taxes but unfortunately it is a subject none of us can escape. Some of you are going to retire in the next couple of years and there isn’t a whole lot you will be able to do to minimize your taxes. However, those of you who have 10 or more years to go may have an option to create a second pension that the government cannot touch.
Most of you know that the money you put in your TSP is not taxed when you put it in. Think of it this way, the government is letting you put that money in now and not pay the small amount of tax that would come out of it now, so he can take big chunks out of your money when you draw it out of the TSP. We like to call the TSP Uncle Sam’s retirement account.
Many will say that taxes will be lower in retirement so if I draw my TSP money out in retirement I will pay less tax. Well, I have a couple of questions for you: 1) Do you have more deductions now or when you retire? For most people the answer is now. By the time you retire the kids are gone and the house is either paid for or so close to being paid for you don’t have that deduction any more. 2) Do you think tax rates are going to go up or down over the next 20 years? Folks, the way the government is using its credit card there is no way any reasonable person would think taxes are going anywhere but up in the future. I mention both of these points to address the myth that taxes will be lower when you are in retirement. I’ve included below the history of tax rates in the US. As you can see, we are very low right now compared to what it has been in the past.
|Historical Highest Marginal Income Tax Rates|
|Year||Top Marginal Rate||Year||Top Marginal Rate||Year||Top Marginal Rate|
So what avenues do you have available to you to save where the taxes won’t bite you in the back side? You have two options really as a Postal employee:
1) Roth RIA or Roth TSP
This is a great way to save money for retirement. You can fund it with after tax dollars and then when you draw it out in retirement there is no tax whatsoever. The downside to the Roth IRA is it is extremely limited on how much you can put in. The limits are $5,500 if you are under 50 and $6,500 if you are over 50. It’s pretty hard to accumulate any sizeable amount of money in a Roth with those kinds of limits. Think about this, the government lets you put $17,500 in an IRA in most cases but he limits what you can put in a tax free vehicle. Interesting huh?
2) Life Insurance
This vehicle has been around for a long time and is still one of the only places Uncle same can’t touch when it comes to taxes. As a matter of fact it’s the only place you can save money with no limit** and it be totally tax free in retirement. Cash value life insurance builds cash value obviously and when you accumulate a large sum of money in a policy you can take the cash out in the form of a policy loan that never has to be paid back. How much tax do you have to pay for taking one of these loans? NOTHING. You would also have to go along with the tax free income a nice death benefit that would take care of you loved ones in the event of your premature death.
Let’s look at a real example of a Postal employee who wants to set up a second tax free pension. This employee WAS contributing $500/pay over and above his match to the TSP. Let’s look at what happens when he puts this same $500/pay into the cash value policy we suggest and see what happens when he retires in 15 years.
Annual Contribution: $13,000
At age 60 the employee can convert his cash value into an annual 2nd pension of $33,000 a year. Remember, that $33,000 is tax free because it is a loan. None of this money would show up on your tax returns. I don’ t know many people who wouldn’t like to have a second tax free pension. On top of the tax free income you have created you would also have a death benefit of $360,000 at age 60 in case you pass away early. All of those proceeds pass to your heirs tax free as well.