Members only content:  In this overview, I’ll keep to generalities that pertain to the qualified vs. non-qualified retirement funding topic. If you want further details on mutual funds, the articles I referenced as a guide offer excellent details without “speaking over one’s head” on the subject.  The chart that appeared in Part 1, along with the referenced articles, is recapped at the end of this Part 2 for reader convenience.
Access Part 1 HERE.

A Considerable Headwind:

First, mutual funds are relegated to two main categories, and the first can be split into a Front-Load and a Back-Load or “deferred sales charge” type. The front load fund assesses a percentage-based sales charge deducted from the client’s deposit, which means that less of the client’s money actually is subject to a return and working. The back-load fund charges a percentage-based sales tax at the sale of the fund shares, with all of the client’s deposit available to earn returns. The third type is a no-load, or no sales charge. No load does not mean “no cost”, in fact, fees are always applicable to some degree.

What type of fees? … and here is where we can get off into the weeds. First, the obvious fees are the disclosed fees that pay to have an “experienced” fund manager run the fund with their skill set on behalf of the shareholders, and the 12b-1 fees that are legal to charge for advertising and sales costs to attract new shareholders. Some managers are more experienced than others, obviously.

There are also hidden fees that apply to each mutual fund, plus a the optionally applicable and common management, reinvestment, exchange, custodial, and administrative fees. While they may not all apply to every mutual fund, each mutual fund is permitted to charge any or all of them.

Sailing into a headwind takes skill, but even riding a motorcycle into a headwind is a challenge; especially if it’s raining!  While the raft of applicable fees can certainly make a considerable headwind, the fact that mutual funds are a form of ownership and directly participate in the risk of market volatility runs a close second in my mind. We’re not so far from 2001 and 2008 that a loss of half is not completely out of sight and the continued foundational and systemic problems that have not been addressed are still howling at us at night from the nearby wood!

In addition to the headwinds, the mutual fund and qualified money combination face considerable tax detriments! First, mutual funds in your trading account require that you pay capital gains taxes on your gains. Granted, these are usually less than earned income tax levels, but taxes are still due. If you are using a Roth IRA, you would have funded the account with post-tax dollars and the account proceeds would be tax free, though you would still be penalized for accessing “your wealth” prior to 59-1/2.

When you bundle the mutual funds inside a qualified for tax deferral government sponsored pension plan (401(k), 403(b), or IRA) the plan is funded with pre-tax dollars and are “locked” until after 59-1/2 for retirement. While there are unique situations for early access to your wealth, they are few and other disbursements bear not only the taxes due that year at whatever tax bracket that disbursement happens to throw you into, but a 10% penalty is also assessed prior to 59-1/2.

If you bought into the common diatribe of “you’ll be in a lower tax bracket in retirement.”, allow me to shed some light on the darkness. Tax brackets are based on your income level, not your age. The only reason you will be in a lower tax bracket in retirement is because you’ll have less cash flow (income). That is not why we sit and plan ahead. If we get started early enough, we could have you earning more in retirement and have a large portion of your retirement cash flow coming through free of both capital gains and income tax!

Section 7702 of the Internal Revenue Code:

Section 7702 of the Internal Revenue Code was established at the request of early 20th Century industrialists who were asked by Congress, the Federal Reserve (central bank), US Treasury, and Wall Street investment banks to cooperate in the proliferation of the income tax on a greater share of the American public heading into the cities from the farms. These multi-millionaire tycoons of industry levied that if they were to assist in the expansion of the tax base through using their own wealth to build and establish industry, that they wanted the option to store and build wealth in an account with special tax considerations.

The question was, “Where might we place these new tax advantages?” Since each of these leaders of industry at the time were multi-millionaires, each held large life insurance policies on themselves. In the event anything happened to them, their families would benefit from the highly leveraged payout of many millions of dollars of death benefit. “What if we build up the cash values in these accounts beyond the cost of insurance and allow the insurance company (and those industry leading investment teams) to continue working with our capital and paying dividends?” Over time they became self-insured with accounts whose account returns covered the account costs; building tax-free wealth; shrewd investing by any measure.

Those options are still provided in the tax code. If they are there for industry executives, successful entrepreneurs, and wealthy families to use, it’s available for regular everyday working people also; they just aren’t aware of it. That’s why I write articles like this…

In addition to the account working so well for themselves, there also exists a provision called “insurable interest”. Here’s where things get truly interesting… If I have an account and am wealthy enough to fund my own account fully and still have financial were-withal of which I can dispose, I can own an account for my spouse, for each of my children, for brothers, sisters, and parents.

I could establish a market-insulated, high-growth, tax-free account and tailor it to accommodate as much of my personal wealth as I wanted; not to mention accounts can be passed to heirs free of income taxes, capital gains taxes, and estate taxes.  At any time, I can assign ownership of those accounts to my spouse or to the insured person.  Now my family members have a tax-free, market-insulated, high-growth account.

Wealthy people have better information and use better strategies…

Consider funding a tax-free, market-insulated, zero-floor, high-return account for educational funding where the funds could be accessed long before 59-1/2 without penalty and used for anything that my student needed without restriction. And, once my student graduated, I could assign that account to my graduate that they can fund through their professional life as their own “tax-free retirement”, and if they didn’t spend all the funds while in school, with a nice head-start on funding.

First, let’s dispel the most common myth: “life insurance is expensive”. Life insurance can be funded and structured to pay for itself, which is how I structure accounts for my clients. The provisions in this section of the tax code were tailored by the most successful money-growing businessmen of the age in the early 20th Century. Why when you read about Rockefeller, Carnegie, and J.P. Morgan Chase is it believable, but not when we discuss it for you? It’s the same account type, same tax code; simply a shift in “scale”.

Term insurance is expensive. It does cost and it will never pay for itself. You pay money in for “the term” (decades), it builds no cash value or asset for yourself, and once you have passed from this life the large cash benefit ends up with someone else. That’s no fun! Why pay for insurance when you can structure insurance to pay you?

If a client doesn’t have the financial standing to support funding their account in a fashion that benefits them, I will help them get prepared by other means; usually through my MoneySmart Solutions book. I have some clients build their accounts slow, and some build quickly; and at all ages.

My youngest client so far is 26; the oldest is 85. The age 26 young professional is on-track to retire by age 55. The better and faster you fund the account, the better and faster it works! How we get the strategy to work for you is a matter of evaluating your specific financial situation. In their 20’s with 30 to 40 years to build, I can usually have a new young client considering retirement 10 to 15 years ahead of where they qualify for Social Security. How?

They aren’t facing the headwinds associated with fees, taxes, and backsliding of market crashes!

The costs are much lower and those costs produce a product for the client: a death benefit that is from 4 to 10 times the value of the amount they applied to funding. That’s excellent leverage for your family! Mutual fund fees produce nothing but an earnings headwind. In addition, you have good returns with no market risk and client-friendly options and guarantees! This isn’t alchemy or pseudo-science; it’s math: compound interest with no back-stepping market crashes.

It isn’t that difficult to set up and fund an account for such a self-sustaining strategy where the account covers its own costs. I strategize my average client to have their account “paying for itself” within 4 or 5 years. Additional funding simply builds the clients retirement, family, and personal wealth. Your 401(k) is not likely to be self-sustaining… ever; and your qualified accounts will always be subject to taxes when funds are distributed, as well as fees while you’re desperately trying to build.

The fastest I’ve seen a client get their account funded so that it pays its own cost of insurance is three years. She opened her account at age 60 and got her accounted funded with some retirement savings that was earning next-to-nothing in the banking system. Granted, she’s a rare gem; indeed… But at age 60, she got it done!

A major consideration that I cover with clients is that they need to think “long-term” when considering these strategies for building retirement, family, and personal wealth. These vehicles are excellent when applied and run correctly but shouldn’t be viewed as a “let’s try it and we’ll dump it if we aren’t happy.” I work hard to ensure that my clients and prospects understand the scope of the strategy and their particular account type. By the time we’re making an application, they fully understand how their account will work and what it can be used for. They are “plugged in” and focused on a long-term game plan that I’ve helped customize specifically for them.

You don’t poke this with a stick…

If your retirement or personal wealth is already “resigned” to the qualified for tax deferral 401(k), 403(b) or IRA system, a tax-free 1035 exchange or “rollover” strategy that provides similar protections (like a zero-percent floor) is available. That option may provide the peace of mind and security you need to protect your retirement wealth from the next market crash.

How I help my clients is simple and non-threatening. I sit with married partners or single professionals and walk them through the strategies, ensuring they understand the possibilities and have a chance to ask questions. I then help them analyze their financial situation and get a feel for the goals they would like to accomplish and the means by which they might accomplish those goals.

I then craft a plan specific to their goals and needs and we schedule a time to review that plan. If we need to adjust the vehicles, they are flexible enough to accommodate adjustment.

You can contribute fifty-dollars a month for thirty-years or roll over a million-dollars from your 401(k) tomorrow; what works best for you is a matter of allowing me to craft a plan specifically for you.

…and I’ll look forward to it!




Access Part 1 HERE.


Mutual Funds[1][2] 401(k), 403(b), and IRA IRC 7702 Contracts
Loads and Fees Front Load: reduces your working capital at purchase by % Front end sales charges on select account type qualify the client for higher rates of return
Back Load: or “deferred sales charge” % paid when shares are sold No sales charges account type costs are taken as a percentage, after the returns (work first, eat later)
Disclosed Costs:

average 1.19%

Your 401(k) or 403(b) custodian may assess added fees. All charges are disclosed by law, and produce measurable client benefits (see leverage below)
Hidden Costs:

Average 1.44%

12b-1 fees:

Advertising and sales cost

Tax Inefficiency Costs:

Average 1.10%

Funded with post-tax dollars, both capital and gains can be accessed tax-free.
Costs of Sneaki-ness:

Average 2.49%

Optional fees: Management, reinvestment, exchange, custodial, and administrative fees Penalties for:

Withdrawal <59-1/2; 10%

RMD fail 70-1/2, 50%

Administrative costs apply, fully disclosed; charges can apply for early surrender (<10-14 yrs)
Death benefit equals balance less taxes on gains; no leverage. Death benefit equals balance less taxes on capital and any gains. Cost of insurance provides tax-free death benefit (est. 5-10x leverage) more than funded
Market risk Subject to volatility, market manipulation, and trading mistakes Required investment options keep funds exposed to market risk. Index tracking removes market risk with a zero percent floor, and guaranteed minimum return
Return Rates Tied to market value, less loads and fees

Money market[3] accounts avg 0.0375%

Tied to market, less taxes due at distribution Track a selected index, or mix:

0-13.5% as a capped option[4]

4.25% margin as uncapped option

Fixed Account – 3.75%[5]

Income taxes LIFO – last money in, first money out; capital gains taxes assessed Funded with pre-tax dollars, all money is taxed at earned income rates, the highest tax rates. FIFO classification – post-tax capital may be withdrawn first tax-free; full balance and leveraged amounts can be accessed tax-free.
Liquidity Outside qualified accounts, shares sold incur sales and other charges; Restricted liquidity to age 59-1/2 or with added taxes and penalties Is 90% liquid at inception for accumulated cash values and becomes 100% liquid post surrender period.
Funds can be accessed for

First home purchase

Education expenses

No penalty, if qualified

Funds (your personal wealth) can be accessed for any purpose without restriction; can even leverage your account value.


Additional coverage at no charge:

Terminal, Critical, Chronic Illness leverage to protect your cash value

Additional strategies for education funding, legacy wealth, and investment funding…


[3] Average for deposits $0.01-$10k:
[4] The S&P 500 Point-to-point capped and uncapped options are the most popular among 25-30 or so indexes and tracking methods.
[5] Current fixed interest rate for the most popular account type, is evaluated and reset annually.

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