Who Controls Your Retirement Money?

By Sondra Forsyth

People make a mistake when they feel as though they’ve lost control of their qualified retirement plans – they never had control in the first place, says retirement advisor Mark Cardoza.

“Qualified retirement funds – whether we’re talking about an IRA, 401(k), Contributory or Defined Benefit Pension Plan, or a Roth IRA – have so many hazards, pitfalls and strings attached to the government that it’s simply misguided to think one has ‘control’ over that money,” says Mark Cardoza, author of the book “Positioning 4 Retirement.” (www.positioning4retirement.com).

“However, the more you know about this money the more control you can get back – and the more money you can keep.” Here, he explains the basics:

Identify the type of qualified plan you may have through your employer – 401(k), IRA, etc. – or your options for a retirement plan if you are self-employed. Plans are assigned these numbers based on the tax code they follow. The employee has the right to participate in the plan based on the guidelines established by the organization and the U.S. government to receive tax advantages. By managing your qualified and non-qualified money properly, you can save on taxes. Often, the employer will match the employee’s contribution and will receive a tax advantage as well. From there, one needs a solid understanding of qualified and non-qualified money, which is based on your retirement plan.

A qualified plan refers to an account that meets certain IRS guidelines in order to be considered a retirement account. It is also referred to as “qualified money” or a “qualified fund.” Qualified funds can be in the form of securities, such as stocks, bonds, mutual funds, CDs and annuities. The money placed in a qualified plan has special tax considerations. Each plan has elements that differentiate one from the other, such as distribution restrictions and limiting plan sponsors. The money that goes into a qualified retirement fund has not been taxed and is referred to as “pre-tax dollars.” The pre-tax dollars grow tax-deferred, meaning until you take a distribution, you do not pay income taxes. The money is taxed based on the individual’s tax bracket and tax rules at the time of withdrawal. The general assumption is that the tax bracket will be lower when the individual has retired.

Not paying tax on the income you earn and allowing it to grow with the funds that you would have paid in taxes causes you to be taxed on a greater portion of money. This allows the U.S. government to be a partner in your retirement plan. Uncle Sam then has control over when and how you can spend these funds. By choosing a qualified plan, you are giving Uncle Sam the ability to mandate and establish rules, regulations and guidelines that can change frequently and in favor of the government. Uncle Sam also has the ability to change the special tax considerations. He is in your pocket and has majority control. The only control that individuals have is how and where the funds are placed in order for them to grow. But Uncle Sam still oversees the placement of money with guidelines and regulations.

Non-qualified plans are those that are not eligible for tax-deferral benefits, which mean deducted contributions for non-qualified plans are taxed when income is recognized. This generally refers to when employees must pay income taxes on benefits associated with their employment.

Depending on circumstances, a strategy combining both categories of money can be most beneficial. For example, those who receive employer matching contributions toward a qualified plan, can opt to put additional contributions in a Roth or a non-qualified retirement plan instead of contributing above the matching limit. This strategy lessens the taxability during retirement, providing the individual the opportunity to manage their qualified funds, yielding a lower tax rate when retired.

“Qualified money is controlled by the U.S. government with guidelines, mandates, laws, and rules that can and do change to meet the needs of the country,” Cardoza says. “It’s important to understand that large corporations drive congress and have influence in developing these mandates, guidelines, laws and rules. But there are strategies available for optimizing navigation in this arbitrary landscape.”

In 2002, Mark Cardoza (www.positioning4retirement.com) was asked to help a family member settle an estate and quickly learned about insurance and its role in estate planning. Shortly after, his father became terminally ill and Mark learned about long-term care needs, such as Medicare and Medicaid. He quickly immersed himself in the industry, learning the intricate functions of asset protection, retirement, estate, and eldercare planning. He holds the designation of CLTC (Certified Long Term Care) specialist and is certified in the area of trusts and estate planning. He is the author of the book “Positioning 4 Retirement.”