I’m constantly amazed at how most people plan for taxes. It’s so different than what you’d see inside the financial plan of some of America’s elite. It’s hard to convince them to lock up money and let Uncle Sam decide the best time and rate to pay taxes. That’s just not very smart.
It’s such a critical topic, and one I hope you won’t take lightly.
I’d like to take a second and explain what I like to call the “401k Predicament.”
You see, retirement plans like 401ks, IRAs, and other government plans are designed to postpone the taxes you will pay on your earned income.
If you are in a higher tax bracket today than when you take it out, you will save money on taxes (you win). If, on the other hand, you are in a lower tax bracket today then when you take it out, you’ll pay more taxes (you lose). So the predicament becomes whether or not to postpone taxes. The truth is it’s not that much of a predicament because the evidence is overwhelming. Most people are clearly retiring in higher tax brackets than in their working years. They are losing the tax game.
In the late 70’s and early 80’s when retirement plans like the 401k started, tax brackets were extremely high and were designed to be lower in retirement years. What worked then is just not working today.
I took the time to interview 5 Certified Public Accountants to tell me what they see everyday as it relates to retirees and tax brackets. I was stunned by the confidence in their answers.
Here are a few of their comments:
“I’m seeing them retire with very few deductions and if they’ve been socking it away in 401ks or just tax deferred plans, I see them retiring with very few deductions and 100% taxable income.” – Kevin CPA
“I see it all the time with people who’ve created wealth, and done the right things with their money throughout their life. By the time they retire they’re actually making more money than they did when they were working.” – Cameron CPA
“I think that most folks expect a lower tax bracket and that doesn’t develop the way they anticipate – Rick CPA
The majority of Americans are socking money into retirement plans that postpone taxes, a poor bet. Across the board people are retiring with more income and/or lower deductions, and it’s truly killing their retirement income. Here’s why.
During your working years you have a lot of things to potentially keep your tax bracket down. The mortgage interest deduction, student loan interest deduction, exemptions for children, and lower income in earlier stages of your career.
It’s likely that inflation alone will bump you into higher tax brackets, but especially when you take away deductions and exemptions, leaving nothing to offset increased income. This is exactly what our CPAs are seeing for many Americans. And the more successful you have been, the more you lose.
And last but not least, it’s clear that the government needs, and is seeking, more revenues. The combination of high spending, high national debt, and some of the lowest tax brackets in history could be a possible indicator of increasing taxes. And as of right now, some of those increases have already taken place.
While I hesitate to make a blanket statement here, knowing every situation is unique, consider the benefits of retiring tax-free. There is peace in not having to worry about what tax bracket the future holds. Chances are you’ll save on taxes and you’ll sleep better at night.
The truth is, more and more people are having the proverbial light bulb over the head moment. They’ve realized that taxes aren’t going down, and they need to rethink their tax plan.
That’s why a tax-free retirement is a breath of fresh air.