Your retirement plan has many benefits. Your CPA’s favorite is likely the tax break you get when you invest in your traditional IRA or your 401k at work.
Are you contributing simply for the immediate sugar rush of a tax break?
Are you contributing because you want to make an investment in providing future income?
Of course, it very well could be both. Likewise, people don’t have a full understanding of either of these two main reasons.
I warn you: do not simply contribute to a retirement plan today for a tax break. Take the time to understand what your options are.
The taxman cometh
There are many factors to consider and with a tax break on the front side, it can be very alluring to sock some money away for retirement and get a break from Uncle Sam along the way right?
Not so fast. In 1978 the 401k was born. The tax environment was very different and federal rates were much higher. People welcomed the opportunity to take the tax break. People were glad to get a break from high taxes and retire to a lower tax bracket.
That probably sounds familiar to you, at the least the concept of lower tax rates in retirement. However, we are historically in the lowest tax environment and with many concerned about our national debt, and social security as well as other programs, and it wouldn’t be a huge surprise if rates when up in our lifetime.
Pay me now, or pay me later
For many, it might make sense to pay taxes on the seed today for the opportunity to let the dollars grow tax-deferred, and – within a Roth IRA, you would receive tax-free qualified withdrawals on the harvest.
Receiving a tax break today could substantially increase your total tax paid overtime.