What does it look like on the other side?
A surprising number of people I speak with throughout each year either don’t know or choose not to focus on the fact that all money in such plans, when distributed, will be taxed in retirement. In retirement, people with savings in these plans will be taking distributions. These distributions will be taxed as ordinary income. The income tax rate and special social security taxes will be based on total income and on the tax rates at that time. The bottom line is that we really don’t know what our tax rates will be or exactly how much income we will have in our 60s, 70s and beyond. But, knowing that the nation has almost $20 Trillion of debt, one might acknowledge that there is at least a good chance that tax rates may rise in the future. Anyone who wishes to plan for the future, must keep this in mind.
What to do?
- If your company matches any part of your contributions, make sure you contribute up to that match threshold no matter what. It’s free money.
- Create tax diversification in your holdings. The following vehicles do not give you the immediate tax deduction but they grow tax free and provide tax free distributions as well. What you see in your statement is what you own!
- Roth 401Ks (if your employer provides)
- Roth IRA (if you meet the income thresholds)
- Permanent Life Insurance products
Summary – Effective income tax rates for individuals are extraordinarily low by historical comparison. People who have a number of things to write off now (mortgages, dependents, business activities) may be better off paying income taxes now and saving in tax free distribution accounts instead. In fact, while no one has a crystal ball, this course of action might very well make the biggest difference in how long your retirement accounts will last.
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