Americans are raving about a new tax-advantaged retirement plan that could add as much as $591,000 to one’s retirement. This vehicle, called an “(H)IRA,” offers a 100% tax-free benefit, but so far only about eight out of every 100 Americans have opened one of these accounts.
An (H)IRA is similar to other retirement planning vehicles like 401(k)s, IRAs and even Roth IRAs in that they allow you to invest in the same types of stocks, bonds, ETFs, mutual funds, etc. The primary difference with an (H)IRA is that it offers a triple-layered tax benefit.
With IRAs and 401(k)s, you don’t have to pay taxes before you put the money in. These vehicles are tax-deferred, so the money comes directly out of your paycheck. But you do have to pay them when you take the money out. And with a Roth IRA, you actually have to pay taxes before you invest in the account, meaning they’re not tax-deferred. You don’t have to pay any taxes once you withdraw from the Roth IRA … but if you paid the average 32% in taxes just to be able to invest in it, that leaves only 68% of your money to grow overtime.
(H)IRAs don’t have these problems. With an (H)IRA, your money goes into the account before it’s taxed. So your contributions are 100% tax-deductible. Once in the account, your money also grows tax-free for as long as you leave it in prior to withdrawal. And upon withdrawal, you can claim both your contributions and whatever gains you made in capital appreciation 100% tax-free.
In other words, you can pay nothing in taxes using this little-known retirement vehicle. With the (H)IRA, you can put money in tax-free … grow it tax-free … and withdraw it tax-free as well. Whereas in other retirement vehicles, you will undoubtedly pay something in taxes at some stage during the retirement-planning process.
It’s such a powerful loophole that some have described it as an “IRA on stero ids,” and even “a retirement gift from the tax gods.”
But given how beneficial these (H)IRAs can be when it comes to saving in taxes, it begs the question: Why do so few Americans have or even know about them? In fact, only eight out of every 100 American adults have opened one of these vehicles.
The answer is simply that Congress never expected (H)IRAs to become such a powerful, money-making tool. It was such a radical and controversial new idea that the congressman who proposed it quietly tucked it into a 700-page health care bill just to get it passed. And for that reason, most Americans simply don’t know about it. And those who do typically don’t know how to qualify.
But a few insiders have already started taking advantage of this tax-free retirement account, and they’re insistent — it’s the best retirement-planning tool for American adults of ANY age. Some are even calling it the new way to retire in America.
Dana Anspack, a certified financial planner since 1995, said of (H)IRAs: “It’s like an IRA on steroids.” Steve Vernon, a 35-year financial industry veteran, wrote: “This beats both an IRA and 401(k) … it’s like a super-IRA.” And Michael Dunleavey, a financial columnist for The New York Times, declared: “This is a great way to squirrel away more for retirement … you can net a triple tax break.”
To get a feel for how much more money you can save by investing with an (H)IRA, let’s take a look at exactly what that triple tax break means for growing and compounding your money.
Let’s say you start with $100,000 to invest in your retirement account, and you want that account to grow tenfold to $1 million. Again, you can invest that initial $100,000 stake tax-free using either an IRA or a 401(k). Assuming a 6% annual return, that money will grow to $1 million over a period of 40 years. But at the average tax rate of 32%, you’ll only keep $680,000, meaning you’ve lost $320,000 in taxes — almost a third of your retirement.
And with a Roth IRA, you start with less money to invest because you have to pay taxes before putting your money in the account. At 32% in taxes, that reduces your $100,000 to $68,000, leaving less money to grow and compound over time. Eventually, you’ll be in about the same boat as you would have been with a regular IRA or 401(k) — retiring with roughly $680,000, far short of your $1 million goal.
But with the (H)IRA, you can hit your $1 million and pay nothing to the taxman. Since you paid nothing in taxes at any stage in the process — before investing, while growing and upon withdrawal — you can keep every cent of the $1 million your original $100,000 investment grew into.
Now, most people don’t invest $100,000 and just let it sit there. Usually, people will add to their retirement account over time to get the most bang for their buck, since more money will compound further. If you were to add an additional $5,000 into your account every year, the end result for each retirement plan would be as follows:
Suddenly, your initial $100,000 soars to $1,848,000 with the (H)IRA, while the other accounts leave you with just $1,257,191. That means, thanks to the triple tax benefits of the (H)IRA account, you could potentially make — or rather, save — an additional $591,000 in retirement.
But the benefits don’t stop there.
For example, most IRA accounts usually come with a number of restrictions that prevent people from investing with them in the first place. You have to meet a certain income threshold, and there are other limitations regarding when you can open and withdraw from these accounts.
401(k)s come with their own set of issues. In addition to the common age restrictions, 401(k)s are extremely limited in the types of investments you can allocate your money toward. Many only offer a select list of funds to choose from.
But (H)IRAs avoid these issues, making them clearly more beneficial than the competing retirement accounts. Unlike traditional accounts, you can actually withdraw money penalty-free for some of retirement’s most troublesome expenses, like health care costs, the single greatest expense for many seniors. And unlike these other accounts, with (H)IRAs, you’re not actually required to withdraw your money at a certain point. You can simply leave it and let it continue growing … even after the typical cutoff date of age 70 ½.
That is not to say that (H)IRA accounts don’t come with their own set of restrictions. To remain 100% tax-free, the money has to be put toward some of the most important expenses that retirement throws at you — such as doctor bills and certain medications. But these are expenses you’d have either way. The beauty with your (H)IRA account is that you could save hundreds of thousands of dollars in taxes, simply by putting the money toward expenses you’d be making anyway.
The fact remains, (H)IRAs offer significantly more freedom than your standard retirement accounts, and the tax savings are astronomical. They’re so big, that (H)IRAs might be the solution to having the retirement you’ve always dreamed of. Finally, you’ll be able to afford that vacation home you’ve been eyeing … or travel to exotic places that you simply weren’t able to during your working years … or even leave more to your children and grandchildren to better their lives. Whatever the case may be, (H)IRAs offer you the freedom to do with your retirement savings as you please — a luxury most retirement accounts won’t afford you.
You can learn more about (H)IRAs, and how to begin investing in them with as little as 15 minutes of your time, right here.