Are you counting on using a traditional, tax-deferred savings plan to support you with retirement income? These products seem to provide a common way for Americans to save for the future. The elephant in the room is that 401k, 403b, and traditional IRAs work pretty much the same way. That is, they offer tax-deferred contributions and growth, but taxes still need to get paid when the money gets withdrawn as income.
In order to really benefit savers, they rely upon the assumption that account owners will pay lower taxes during retirement than they do now. According to “How to Access and Bequeath Your Savings Tax Free,” this assumption may not be valid and is one major reason why current retirement plans are failing.
Assuming That You Will Pay Lower Taxes on Income During Retirement is Risky
Anybody who follows the current political campaigns knows that a lot of the rhetoric centers around taxes. On both sides of the aisle, politicians speak about who pays too much, who doesn’t contribute enough, and of course, what these taxes are supposed to buy. Typically, candidates zero in on different groups of people who should have their taxes raised, hoping their potential constituents are in some other group. One thing that most candidates skirt around is that current tax rates are almost certainly untenable, and giving breaks or raising taxes on certain groups of people may not be enough to service the deficit or even provide government services.
The Washington Post put it pretty succinctly:
“The present campaign rhetoric will ultimately prove hollow. If middle-class Americans need or want bigger government, they will have to pay for it. Sooner or later, a tax increase is coming their way. There is no tooth fairy.”
The Post article went on to analyze some proposals from politicians in either party. For example, increasing the rate on the top tax bracket to 50 percent would generate $100 billion. That seems like an awful lot of money, but the federal deficit for 2015 exceeded $400 billion. It wouldn’t be enough to pay bills and probably wouldn’t do much to address the income inequality that has become another talking point on the campaign trail. Alternatively, plans that reduce corporate taxes in order to stimulate the economy aren’t expected to increase revenue enough either, with anticipated shortfalls that range in the trillions of dollars over the next decade.
Who Do Traditional Retirement Plans Help?
Traditional retirement plans are great for financial planners, investment companies, and banks that all serve to profit from the use of their client’s money. Not only do these organizations get to hold your money, but according to a Forbes report, “Why 401ks Have Failed,” many charge you way too much for the privilege of doing so.
You could do a great job of saving for a comfortable retirement. Still, if you defer taxes, you could find yourself paying more taxes on your withdrawals than you would have if you would have just paid them in the year that you earned the income in the first place. If you do, deferred savings plans might work out pretty well for the government too, but they might not work out so well for you.
You also usually have to follow some strict rules just to keep your money in these plans. For example, you may get penalized if you withdraw your money early, so you give up the use of your money now in order to enjoy benefits later. If you do end up paying taxes at a lower rate, it could work out for you; but if you don’t, you got a pretty bad deal.
Learn About a Better Way to Build Wealth for Retirement and Your Heirs
Of course, your retirement plan should be centered on helping yourself, your spouse, and your family. The government and the banks have plenty of resources, and they may rely upon you paying your fair share, but you shouldn’t need to get tricked into paying more than your fair share. This is particularly true during your retirement years when your entire strategy should rely upon preserving wealth and minimizing fees and taxes.
There has to be a better way to minimize taxes and build wealth for retirement, and there is. Contact Paradigm Life to learn how you can build a better retirement, while also making a plan to leave wealth to your heirs.