Castles & Moats

Insurance and Investment Planning...Simply Explained

Alternative Strategies2018-07-05T21:30:00+00:00

Chapter 21

Alternative Strategies Aka Non-Qualified Plans

There are two methods of accumulating wealth in America.

  1. Qualified Plans
  2. Non-qualified Plans

Most of you are either participating in, or contributing to some type of Qualified Plan. Qualified means it’s “tax-qualified” in the eyes of the Internal Revenue Service. IRAs, Self Employed Pension Plans (a.k.a. SEP), 401(k) plans, 403(b) plans, profit sharing, & pension plans are the most common. All of these plans are governed by ERISA (Employee Retirement Income Security Act)

Since they are qualified in the eyes of the IRS and the US Government, guess who makes up the rules? Exactly…they do. I’ve talked about some of the pitfalls of mismanaging $$$ in these accounts in earlier chapters.

So, what is a non-qualified plan? Exactly that. It’s not qualified in the eyes of the IRS and the Government, and they fall outside ERISA guidelines, so they don’t get to make the rules on when you put $$$ in, and more importantly, how you take $$$ out.

Granted, non-qualified doesn’t mean tax-free. But it does imply that maybe you & I get to make the rules on some of these types of plans. I see these most prevalent in companies where they are designed to meet specialized retirement needs for key executives and other select employees.

When people come into our office for conversations, we generally find that the ones with real wealth came to it via business ownership or real estate. We see nice account balances in most people’s retirement accounts (Qualified), but the real wealth is their “non-qualified” assets.

One of the biggest dilemmas in retirement planning today is the focus on WEALTH ACCUMULATION. Dr. Robert Merton wrote an article in the Harvard Business Review in July 2014 entitled “THE CRISIS IN RETIREMENT PLANNING”. The subtitle is even more telling. He says:

“Our approach to saving is all wrong: We need to think about monthly income, not net worth.”

The premise is simple. The old “defined benefit pension plan” that gave our parents and grandparents the promise of a monthly check that neither spouse could outlive is gone! Today, the onus is on us to fund our own retirements…and as a society we are failing badly.

Remember I’m about as comprehensive in my practice as anyone you will ever meet. Many of my clients own rental real estate in lieu of funding retirement accounts. Here’s why.

If you think of all the different investments available to you, they have three distinct characteristics:

  • Growth
  • Income
  • Tax Advantages

A stock, individually owned, will give you growth via share price increase, and income via dividends…but no tax advantages.

A bond, individually owned, will give you income via interest payments, and depending on the type of bond, say “Tax-free Municipal” bonds, they will pay interest that is tax-free…but little to no growth.

If I take that same “stress test” to investment real estate, let’s see how it works.


  • I buy a duplex as an investment property in 1995.
  • Will it grow with appreciation? Yes, it will.
  • Will it pay income via rents? If properly managed, yes it will.
  • Does it offer tax advantages? Yes, it does through depreciation, deductible expenses such as mortgage interest, property insurance, maintenance, and property taxes.

I’ve never seen another investment that gives me all three characteristics. I’ve had this conversation with dozens if not hundreds of realtors.

Disclosure here: I am not a licensed realtor, nor will I ever be. However, I do understand the strategies they offer as investment vehicles.

The primary reason I bring this up is that if you think about that duplex I purchased, and let’s say my goal was an “income later” strategy. My focus was taking all the rental income and reducing the mortgage balance as quickly as I possibly could.

Today, in 2017, I have a debt free duplex and I’m getting $2000/month on each side. What have I created for myself? Go back and reread the quote from Dr. Merton! I have created monthly income for myself, that if managed properly, will last me my lifetime, and can be inherited by my family after I’m gone.

Is the income taxable? Of course, it is! But it’s hitting my mailbox monthly regardless of market conditions, political changes, and all the other stresses that will affect my retirement income strategies, such as my 401(k) and IRA distributions.

If this appeals to you, there are two key people you need to have at your conference table: your realtor and your mortgage lender. They are the ones that will create the “entrance strategies” and find the appropriate property for you. I can crunch numbers with the best of them, but it’s these two professionals that you need to engage.

Ready to talk?

If you’re in need of auto, home, landlord, or life insurance, I look forward to getting to know you and becoming your partner in protection.

Let’s Talk