We always hear about retirement plans that 'defer' taxes, but all that really means is you simply 'POSTPONE' the inevitable taxes, since it’s a matter of 'when' the taxes are paid.
The tax will be paid at some point, whether by you or by your heirs.
But by postponing the taxes, we are counting on two hopeful outcomes:
1) We hope that whatever we invested will grow and give us a good return on our money, and
2) We hope to be in a lower tax bracket when we retire than what we are in right now.
In the first issue, what is the problem? Investors may produce a very small return, or even lose their investment entirely. Even after the market declines over the last few years, most tend to think that this 'Lost Decade' is over and can’t happen again, so we keep our money in the market. We have to be realistic and think through some of the 'worst-case scenarios' and only put money at risk that you can afford to lose.
In the second issue, many have believed in the past that they will be in a lower tax bracket once they retire than what they are in now, but more and more who are actually retiring are discovering that theory isn’t necessarily the case. The effective (after deductions) tax brackets have been higher in many cases, and the retirement income can create additional tax burden. Some studies have indicated that deferring taxes could result in your paying at least 118% more tax, and that’s even assuming the marginal tax rates won’t change.
However in today’s climate, many experts believe that tax rates in this country are going to be rising in the near future, perhaps even at an alarming rate. This belief can be easily justified when you look at the new federal, state and local government debt and stimulus measures that continue to take place. The required revenue will have to come from somewhere, and more than likely it won’t come by simply cutting expenses. Some experts have suggested that future tax rates for couples who make over $200,000/year (single over $100,000) could be as high as 62.5%.
You may have heard the analogy before. If you were a farmer and you had the choice, would you:
1) save taxes on the seed you bought in the springtime and pay tax on the sale of your harvest in the fall, or
2) pay tax on the seed and sell your harvest without any tax on the gain? Given the potential increases, your overall economic strategy should take this into consideration.
And this method isn’t only restricted to a Roth IRA ...
Email me today, for your Free report and illustrations, and learn how to avoid these Tax Traps -and- reduce your investment risk in the process.
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