Qualified Plans vs Infinite Banking Accounts

Either or Both

A "Qualified Plan" is a "Deferred Tax" account specifically designed as a retirement savings account. These accounts include 401(k), 403(b), Thrift Saving Plan (TSP), and IRAs. Money is deposited into these accounts Pre-Tax - that is, income tax is not assessed on the money going in. The income tax is deferred until the money is withdrawn.

They can be a good addition to one's retirement savings plan, especially since Pensions are a thing of the past - a real rarity in today's employment world. However, we do not recommend these accounts as the main or only account to be relied on for one's retirement.

There are a number of problems with these accounts that typically don't show up until the account is needed for retirement income. And then it's too late to do anything about them. 

On the positive side, many employers will "match" what the employee contributes to these plans up to a specified limit. So that's basically "free money" to the employee. And that's great! Also it is possible for these plans to experience terrific gains over their lifetimes. Key word there is possible...

There are three big caveats with Qualified Plans. 1) ALL the money in the account is subject to Risk of LOSS in the case of a stock market, or Index, or Fund downturn. In fact in the last two recessions 401(k)s typically lost 50% of their total contents.

2) There are loads of FEES associated with any kind of "managed" fund accounts. Those fees can diminish the gains and severely eat into that retirement income.

This is an excerpt from an article in  FORBS Feb 2018...  Mutual funds are a staple in many portfolios, including employer-sponsored plans such as 401(k)s. The example below is based on a mid-cap mutual fund with a 1.02% expense ratio, or management fee, that, according to fund-tracker Morningstar, is below average for funds categorized as U.S. mid-cap equity blend.  Because the 1.02% investors pay annually is taken out as a percentage of the portfolio’s value, the larger the portfolio, the more an investor pays, as shown in this table:  As is true for every investor, regardless of age, there’s an opportunity cost associated with taking money out of a portfolio to cover fees. The table above shows how the additional decades millennials have to invest amplifies the effect.  Even though the investor continues to get the same 7% average annual return, our analysis shows the percentage of value lost to fees climbs higher as the years pass. In this example, from ages 45 to 65, the loss to fees increases from 12% to over 25%. In all, over the course of 40 years, the impact of fees is more than $592,000. “Everyone talks about the benefits of compounding interest, but few mention the danger of compounding fees,” says Kyle Ramsay, NerdWallet’s head of investing and retirement. 

There are also "Subaccount" fees and 12-b1 fees. 

3) This may be the biggest issue with Qualified plans: When you take your "distributions", (withdrawals), you will pay income tax at the then current rate on every dollar. If you look at the graphic at the top of this page you will see that the current tax rate is the lowest it's been, and the national debt is the highest by far than it's ever been and rising. Most people agree that the income tax rate can only go up from what it is now, and that means that in retirement people will have to pay a higher income tax on their retirement funds.  

In addition to these three big issues, there are a bunch of restrictions and penalties associated with Qualified plans as to how much can be deposited in a year, when you can, and when you must take distributions, etc.


Infinite Banking Accounts

Infinite Banking Account - Liquid Cash Asset


Because the contributions to these accounts are after tax - that is after you've paid income tax on the money - you never have to pay income tax on your contributions again. And the dividend interest is paid to your account on a tax deferred basis the same as with Qualified plans. The big difference here is that you never have to pay income tax on the gains either as long as you follow the rules. (See MEC under Finance Principals)

The money in these accounts are not subject to the risks associated with investments accounts, in fact they are protected against every sort of intrusion such as garnishments, law suits and even bankruptcy.  

Infinite Banking accounts are Liquid Cash Savings Assets and are accessible without taxation or penalties. And contributions are not limited the same as with Qualified plans.

As a result Infinite Banking accounts are a very useful tool that can be used to maximize one's income during their working years and provide a tax-free income in retirement without having to worry about hidden fees and loss of savings due to downturns in the stock market.


Modefied Endowment Contract

A MEC is a life insurance contract that has exceeded the IRS limitation on how much cash can be deposited into the account according to the 7 Pay Rule that was instituted in 1988 when the IRS noticed that people were using their Whole Life policies to grow their wealth without paying taxes on it.

When the cash infusion thus exceeds the IRS imposed limit the insurance policy looses the tax exempt growth benefit. As such a MEC is NOT suitable for use with the Infinite Banking Strategy, because withdrawals then become restricted the same as with qualified plans and are taxed and penalties may be incurred.