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Tax-Deferred Isn’t Always Tax-Preferred

By Kenny Porter, Kenneth Porter & Company



Beliefs Drive Behaviors

If I believe that I will win the Powerball lottery in the next draw, I should buy Powerball tickets! Right?


Let me give you another example. If I believe that I will be in a lower tax bracket due to a decrease of income in retirement, then I should contribute as much money as my cash flow allows into tax-deferred retirement vehicles. Right? This is what my advisor has told me when I contribute to my traditional IRAs? This is what my employers have led me to believe when they encourage me to max out my 401(k), right?


In both examples, a belief about the future has correlated with the behavior. But allow me to challenge that belief with my idea of what my future looks like.


In my retirement bucket list, I do not mention a decrease in income. I would like to believe that most folks don’t either! Yes, there will be a decrease in “wages.” I will no longer be getting a W2 from employment, but that is very different from income/cash flows. In having this opinion, I would also say that most folks do not want a decrease in their standard of living in retirement! Quite the contrary actually. When I retire, I want to travel wherever and whenever I want. I want to do all of the promised things of retirement now that time is on my side.


Cash Flow Is King

The number one drag on most American’s cash flow in retirement is Uncle Sam through taxes. How so? Because the behavior of citizens has not necessarily matched their beliefs about retirement. One thing people fail to realize is that income stacks, especially in retirement. Social security, pensions, interest/dividend income, qualified plan distributions, etc. While wages may no longer be, the presence of income is certainly not decreasing for many. Hence, revenue for the government goes up, and our cash flow goes down.


Stop Contributing To Tax-Deferred Retirement Plans

How come the government gives tax deductions and credits for tax-deferred retirement plan contributions? Wouldn’t that decrease governmental revenue? Absolutely… for the time being.


Think about it this way – who else is earning a rate of return on your traditional IRA or 401(k)? Uncle Sam! Because he knows that taxes will increase, people’s income will rise, and markets will continue upward!


“Is the government trying to trick you? The answer is very simple – yes!” – Van Mueller: Power of Zero Documentary

5 Tools To Mitigate Paying More Tax In The Future:

  1. Use tax-free accounts as much as possible.

  2. Stop using tax-deferred retirement accounts.

    1. I am a firm believer in getting free money from employer-sponsored plans. Many offer Roth options now. If not, still get the free match, but analyze the consequence of contributing more than the match.

  3. Stick to a budget and save, save, save.

  4. Purchase permanent life insurance.

    1. Life insurance cash values and death benefits are tax-free and a great way to transfer wealth to heirs.

  5. Get a second opinion on your financial situation if your advisor is recommending contributing to tax-deferred accounts.

 

For more information, read the full article here.

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