Remembrance of Taxes Past

The week preceding April 15 is hardly joyous for most Americans.  For those willingly or otherwise attempting to save for retirement in a plan like an IRA, we should take this solemn time to remember what “tax-deferred” really means.  On the advice of a trusted financial advisor, you were told that you would save on taxes by contributing to your future self. For the current tax year, that certainly is true.  But will it always be true?

The carrot of tax-deferral works like this:  In the current year, your total income is “reduced” by the amount contributed to the plan  (If you had something like a 401 (k) plan, then you never saw the money anyway).  We say that the calculation of your taxes for the current has been changed. That’s great.  What happens to the money in the plan?

The calculation of that tax burden has been postponed. How much that money will be taxed, at the time you withdraw it, is anyone’s guess. Whoever advised you to participate in such a plan probably said something like, “your tax rate will be lower when you retire.”  This could imply that you sincerely expect to be poor at that time, but more importantly, it makes a highly questionable assumption about what your tax rate will be at that time.

As you may have noticed, the US government has been printing money at an unprecedented rate (I think it would make most Roman emperors blush). That additional money is collecting interest, piling up every year throughout your working years.  Taxes are used to pay that principal and the interest.  Do you think that sum will be more or less when you retire?

This brings us back to your future self. What do you think will happen to your tax rate at that time, no matter how well-off or poor you might be? My guess or yours is not very important, it is simply a risk. All this is to say that you may need to reassess your current year’s known tax burden with a future unknown one.  Today there are people entering retirement who only just realized that these savings are taxed.  Tax-deferred is not tax-free.  Also, the rules of that deferral can change every year, and often has (for example, have a look at the SECURE Act of 2020).

There are other options for planning for the future. Privatized Banking offers the possibility of reducing future risk to your nest egg.