I hear time and time again from people who have maxed out their retirement program (ROTH IRA, 401(k), etc.) or who have plans to retire early and feel as if there are no other options to save. They are often perplexed by the rules and are unsure of other ways to save for their future.
From a financial consulting standpoint, this is fascinating to me and indicates that the financial services industry is doing a horrible job educating people about their options.
The truth is, government programs, or “retirement accounts,” have been touted as the way to save for retirement and have become the status quo for saving for the future.
So, what is a government or qualified program? Qualified (Q) programs (such as 401(k)s, IRAs, ROTH IRAs, etc.) are government-sponsored programs that come with strings attached. They impose contribution limits, income limits, and restrictions on when and how you can access the money.
- If you make too much money, you are limited to how much you can put into government programs.
- If you save too much money (yes, too much), you are capped at how much you can save into government programs.
- If you want to retire earlier than what the government calls retirement age, there are strict rules that have to be followed to access money held in government programs.
With all of these rules, why do people put money into these programs? In short, they are easy to set up through an employer and carry some tax deferral or tax-advantaged options. It’s kind of the American way; it’s easy and offers some instant gratification!
So, what is the alternative for those high-income earners, early retirees and good savers other than government programs, which, as we’ve described, are likely not suitable for your situation.
The alternative is a nonqualified (or nongovernment) program (NQ). These programs give you control and flexibility over how much you save, where you save and when you have access to your money.
They have no income or contribution limits and no age 59½ restrictions that penalize you if the money is used before the government says you can use it. (However, some products do carry restrictions that you should be aware of, but these product-specific rules are not imposed for all nonqualified accounts.)
In my book, Common Sense, I highlight the fact that many people confuse tax code with the product they are depositing money into.
For instance, IRA, ROTH IRA, 401(k), 457 or 403(b) plans are all government tax codes. They are how the IRS knows how to tax you.
A mutual fund, ETF, stock, bond, annuity, life insurance or other alternative investment is a product that actually holds your money. These “products” can be held inside or outside of a “tax code” and often have more options outside of it.
So, before you throw up your hands and assume the only way to save for retirement is through the government, think again. You have a lot of options available to you.
Have a question now that the veil has been lifted from your options? Let me know. I get a lot of questions about this topic and enjoy pointing people in the right direction.