Did you ever wonder if there is actually tax savings when you contribute to an IRA, 401k or another pretax investment? Your CPA or tax consultant will say you are getting money back if you contribute. The tax deferral is in the plan and not in your pocket! The cash flow or net income is what you must consider not the supposed tax deduction.
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The example above shows you contributing $10,000 pretax which means you will pay less tax but you still had to put the money into the plan which which does not help you with ultimately paying less tax. The contribution will just give you a delay of tax hoping to be in a lower tax bracket when you retire which would mean you would be receiving less income in retirement. Lowering your income in retirement would be difficult especially when most of your income that you receive is taxable. If you are receiving lower income in retirement it would mean you are enjoying less! Will you lower your standard of living because you retired or will you be spending more money because you are not working 9-5 any more!
I ask these questions!
Do you believe tax brackets will be lower or higher in the future?
Do you believe you have more or less tax breaks?
Do you believe you need more income because of inflation?
Do you believe the government will not hijack these tax deferred accounts because they need money?
Do you believe that the tax you where suppose to pay earned more interest because it compounded?
Do you believe that you are deferring tax to just pay more tax in the future?
Those are questions that are not usually posed, but it sure does seem like we're hoping we'll be poorer later than we are today, so we can pay less taxes later....yet in reality, taxes never go down, so chances are you'll end up paying more tax on the less income your hoping for....not to mention inflation...I see wealth erosion, instead of accumulation in the scheme most people are opting for...geesh!
ReplyDeleteTo end up not enjoying your money is the problem. The institutions use scare tactics or strategies through their advisors to show people on how to make the financial institutions rich! Most people end up just enjoying a little income, pay high taxes & fees and leave a legacy burdened with taxes & fees.
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