There are always risks involved when making long-term plans, especially when those plans center around money and an uncertain future. The truth is we as Americans tend to plan for the future we want and not necessarily for the future we will have. Those who truly think ahead plan for unfortunate events and the costs that come with them. Those that study the past before they look into the future have an edge because they may be able to avoid certain unfortunate events and are therefore able to avoid the costs that come with these events. This article-blog will discuss historical American events which have led to the establishment of the Individual Retirement Account, known as the IRA, as well as some of the potential risks and some of the risks you can count on when you hold an IRA. Please read on.
The IRA was introduced to the American public in 1974. Congress passed legislation that it felt would give Americans more financial options to use in order to plan for retirement. One may say, however, that the legislation gave the U.S. Government more power to see and control the savings habits of it’s people. Consider that prior to the 1970s unless you had a pension program through your employer, you’re only course of action to save for your retirement was to put money in a bank or keep cash under your mattress. Back in these days if you did both, you might have been considered financially diversified!
The problem with this system, perhaps as far as bankers and their politician friends were concerned, is that the people still had most of the control over their money. They could deposit or withdraw as much or as little as they chose or saw fit. Money under the mattress is hard to tax and perhaps worse yet the bankers, they couldn’t get their hands on it. Insurance companies didn’t necessarily like people keeping large amounts of cash in their homes as well. When the bankers and the politicians and the insurance companies all got together, they came up with a swell plan that would allow them to take money out of your paycheck before you ever saw it and transferred to their coffers where they could make up rules and penalties as they saw fit, and realistically change the rules anytime and every time they wanted.
Some Potential Risks
Perhaps one of the best known risks associated with IRA’s are the early withdrawal penalties. Compared to the early withdrawal penalties associated with bank CD’s (Certificate Of Deposit), the IRA penalties are more like losing an arm while the CD penalties are more like losing a fingernail. Here is why. When you close a CD early, you forfeit a portion of the interest you have earned, but no principle. When you access the wealth inside of an IRA before you turn fifty-nine and a half, you’ll pay at least a 10% penalty, and further taxes will be withheld. These taxes can vary greatly depending on your income and the amount you withdraw and they will affect your year end tax preparations.
Speaking of taxes, one of the reasons most often given in favor of opening an IRA is tax savings. However, many financial “moon’s” must align if any tax savings will truly be realized. The idea behind what is known as a simple IRA is that if you contribute part of your earnings directly from your pay to this account, taxes will not be paid on the amount you contribute until you retire and begin taking distributions from your account.
In order for this to work in your favor, the taxes and tax rates that are in effect when you retire must be lower than they are when you earn the money you contribute. The theory is that once you retire and stop earning income you will end up in a lower tax bracket than you were in the prime of your career when you are making your contributions. However, Americans have seen taxation and tax rates increase steadily over several decades. f the tax rates continue to rise, you may end up paying a higher tax rate on your contribution than you would have paid if you would have just taken the money home in your paycheck.
Another risk is that you might actually become wealthy, or wealthier than you had expected. In this case chances are pretty good that you will be in a higher tax bracket when you retire than you were when you were younger and had less money but were contributing money you could have used at the time for other investments. Either way you lose in the tax man wins.
Realized Risks Of Owning An IRA
Perhaps the biggest risk of owning an IRA filled with dollar denominated assets such as stocks and bonds and mutual funds and annuities is that the value in purchasing power of the dollar is not stable. This is very apparent in the prices of things we purchase on a consistent and long-term basis such as gasoline, food, housing and energy expenses. I remember when gasoline was 69¢ a gallon. I remember when my father would hit the roof when the electric bill was more than $100. My mother used a budget $250 to feed a family of five for a month. In the early 1970s the 1 ounce gold coin could be had for under $100.
Today gasoline is a bargain at $2.00 a gallon, the only way you will have $100 electric bill is if you have a one bedroom apartment, $250 will feed one person for a month as long as you eat off the dollar menu, and a 1 ounce gold coin will cost you $1300.
In this equation a gallon of gas, the kilowatts of electricity, the cart full of groceries, and a 1 ounce gold coin are the constants, is the number of dollars necessary to purchase these items is the variable. If you own an IRA full of the dollar denominated debt instruments, you own variables. If you own an IRA full of 1 ounce gold coins, you own the constant.
Being that the whole point of a retirement account is to have financial resources available to you when you’re too old or no longer able to work, what would you rather have 30 years from now, variables or constants?
If you would like to discuss putting stable gold products to work for you within your retirement or estate planning strategies, please contact an ITM Trading Representative at 1.888.OWN.GOLD or 1.888.696.4653.