Updated: Oct 15, 2020
If you've read my last blog post (Link here: https://davidkinderfinancial.wixsite.com/davidkinderfinancial/post/will-your-advisor-pass-this-ira-test)... you know that I'm challenging the "common" but imprecise terminology around financial planning concepts. In that last blog post, I posted that your IRA is not an Individual Retirement Account... but an Individual Retirement Arrangement... and that makes ALL the difference in the world. Well, let's talk about 401(k), 403(b), 457 and any other kind of "IRS regulated" plan. Everybody says "your contribution is a tax-deduction."
Wrong. Even the IRS has this correct in their publications, but no one is using the proper terminology. First term never heard: You are entering into a "salary reduction arrangement" with the IRS.
Search for that term ("salary reduction arrangement") in the IRS Publication 560 for Small Business (SEP, SIMPLE, and Qualified Plans):
Second term never heard: This contribution is called an "elective deferral". This is NOT a deduction, but an elective deferral. So, let's put those concepts together: "Salary reduction arrangement" + "elective deferral"... doesn't common sense (which isn't so common) say that you're in an arrangement until they decide when you have to distribute these funds according to THEIR agenda and "needs". Now, is that what you WANT - to have a WEALTH AGREEMENT with the IRS?
I'm NOT saying they're "bad". I'm saying that they are SORELY misrepresented with improper terminology.