Is Tax-Deferral always a good strategy?
Some believe that deferring tax on income is not such a great idea and that you should pay your taxes now. It's possible that, if the Democrats win the Presidential election and have control in Congress, the income tax rates could rise above where they are now. If that were to happen, then those who previously deferred paying taxes will end up paying a higher rate (if it stayed that way when they turn 59 1/2).
Any comments on tax-deferreal as a strategy?
Any comments on tax-deferreal as a strategy?
I agree, most people are in their lowest tax bracket right now...even if the dems don't get in the cost of SSI & Medicare etc is going to drive up the tax base unless something is done and congress will just delay any action because it won't be pretty and all they want to do is get reelected...I tell my clients to use a ROTH IRA any time they can first...but with phase outs this is not always possible, annuities help, in a non qualified savings account if you plan on annuitizing them when you draw out the money as it comes on in a blended fashion...but this is just for a portion of your over all savings program, what I really show is how a life contract over a long period of time (20 years plus) will allow you to beat any IRA if structured properly.
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The income tax rates when we are older aren't known yet, so I think it's not possible to make an informed decision about it unless we can know more about what will happen. So far I have put money in IRA's also because of the deduction I get now. Because interest, it seems that more invested now grows more quickly. Also, I do it because the money in my IRA accounts can be used for a home purchase without a withdrawal penalty.
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Thank you for your post...it might be helpful to readers if you clarify how much can be used for a home and only for a first home. IRAs can be used to purchase real estate, but only for investment purposes, not to live in.
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Whether or not the Democrats or Republicans take office it is more than likely that we will see a tax increase in the future. With that said it is important to be well diversified, I say this meaning that you have tax deferred assets, taxable assets (currently taxed), and tax free assets. But, how do I get tax fee assets? There are several ways to ensure you have some tax free investments when you retire. For example Roth IRA's and Roth 401k's and along with life insurance. The issue with Roth IRA's is that there are income limitations to them, and unfotunately only some companies are offering the Roth 401k's at this point in time. Thats all great but you said life insurance. Thats right, a permanent life insurance policy builds a cash value, this cash value can be withdrawn tax free, also there are ways to use loans against the death benefit but that can become quite complicated. Either way it is important to establish a well diversified retirement portfolio, not just in investments but in investment vehicles as well.
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My answer to any investment strategy is "it depends." I agree that it is not possible to know the future, and therefore IRA's can be extremely risky.
A few points to take into consideration:
1. You have no control over IRA tax laws. Laws can change and there is no grandfathering. For example, the age at which you can take out an IRA without penalty is currently 59 1/2 but that could easily change before we get to "retirement." Would you ever want to enter a contract with someone if in the contract it states that the other party can change the contract whenever they want?
2. Income taxes are lower than now than most years in history. Since the federal income tax was approved in 1913, most years' average income tax brackets have been higher.
3. Even if taxes don't increase, your tax bracket will increase. For the sole reason of inflation, you will be in a higher tax bracket if the tax brackets stay the same. Ask baby boomers if they are spending less or more money than they were 20 years ago even for basic essentials. You will pull out more income than you are currently making. Also, many of us have write-offs with our mortgages and children. If someone wants to pay off their home before retirement and children are empty nesting, then we lose the write-offs when we begin pulling money out of our IRA. Furthermore, when Clinton was in office, there were additional taxes, like the excise tax, on top of income taxes for having a certain amount of money in qualified plans.
4. Why defer use of that money now? I know I can produce a greater rate of return having utilization of my money now than keeping it in a government controlled vehicle. What is the lost opportunity cost of locking away money for a very long time?
Each person's situation is different and these are only a few of the points that can be considered.
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