Taxable Or Tax Free Retirement Income?

Those who were at the max tax bracket in the eighties and contributed to their qualified plans and have retired in the past five years have done well for themselves in their tax planning. They took a bigger deduction while deferring the taxes and have been paying smaller taxes while taking the distributions. There is a nice positive tax arbitrage there.

Those who have been and are contributing to their qualified retirement plans post 35% tax era need to sit back and think through the consequences and wisdom of using tax deductions and deferral now. There is a misunderstanding that by having a qualified plan and taking a current income tax deduction taxes are saved. No we do not save. We are deferring the taxes agreeing to pay the IRS their share when we take the money out. What could be that share? Who knows? Do we have say in that?

While no one has a crystal ball as to where the income tax rates could be in 5 or 10 years or more, anyone who has some knowledge of our current astronomical national debt running into trillions of dollars, besides other mounting economic challenges, may agree that the kind of positive income tax arbitrage enjoyed by a few is unlikely to be there for foreseeable future.

What this means in dollar and cents is, we contribute to our IRA and other qualified retirement plans and take an approximate 35% deduction. When it is time to take our retirement income, would we be paying a reduced 25% or the same 35% or an increased 50% or 60% or more income taxes? It is anyone’s guess as to whether the taxes will go higher or lower in the future given our scary economic conditions.

The question then is whether it would make sense to forget qualified plans, pay the taxes now on the SEED MONEY when the tax rates are at the lowest in a long time and look for vehicles where one could reap much larger tax free harvest later.

Good Luck With Retirement Investing!