There are only two things that impact the results found investing in a qualified plan: Current Taxes Change or Withdrawal Taxes Change. The History of Taxes becomes very important when deciding to contribute or withdrawal. The government's role in legislation concerning qualified plans. The QP story. |
There are basically two things, which can have a dramatic impact on your money in a qualified plan. The first is if current taxes change during your years of contribution. Obviously the higher tax bracket you are in during the years of contribution the greater the apparent tax deferral. The second factor is your tax bracket at the time of withdrawal. If you can get the money out of the qualified plan at a lower tax bracket than you were in when you made your contributions it is to your benefit. If you must withdraw the money at a higher bracket than you were in when contributions were made it is less advantageous. Understanding the benefits, which can be received, requires a good understanding of exactly what is going on inside a qualified plan. I would like to walk you through the QP story to illustrate how these type plans work. QP Story Script: Perhaps the easiest way to explain what really happens is with rate of return. Increasing taxes at withdrawal decreases you QP’s return because the tax at withdrawal is increased. Decreasing withdrawal taxes increases you QP’s return because the tax at withdrawal is decreased. We can prove this with dollars and rate of return. Let us use rate of return first. Let us assume a $2,000 annual contribution with 0 match and an investment return of 8%. If we look at three working periods of your life ( in this case each period is for ten years) and keep the tax bracket at 30% for all three periods as well as at the time of withdrawal we will see that our rate of return is 8%. This proves the calculator is correct. If we change the withdrawal rate up we will notice that our rate of return will go down. If we change the withdrawal rate down we will notice that our rate of return will go up. The rate of taxes at the time of withdrawal has a dramatic impact on what happens to out money in a qualified plan. |
No math is presented on this screen. |