“If everyone else was jumping off a bridge would you too?” asked the child’s mother as I eavesdropped.
That one line brought me back in time 30 years. Every parent has asked that question; every child has winced at the words. That question is usually reserved for when, as children, we are about to do something that is not in our best interest. It is usually the result of peer pressure.
So on the edge of what bridge are most police officers standing? Tax-deferred retirement plans. Many people are out there trying to convince you that you will be better having the tax dollars work for you NOW, creating a larger balance in the future. However, mathematically, it doesn’t add up. If tax rates stay exactly the same, (which is a huge IF considering the amount of our country’s debt and the huge amount of money spent on bailouts, healthcare and getting into the auto and banking industries), there is NO benefit. The only benefit comes from having lower taxes in the future. Everyone is yelling “Jump, jump, jump!”
I am not opposed to people saving in a retirement vehicle that is tax deferred, if that is their one and only choice, or if there is a sizable match to compensate for future taxes. However, police officers do not get a match in Deferred Compensation!
Here’s a quick example. Let’s say you had two choices to make: one is to earn $1,250 in taxable income and to make a Roth IRA contribution. The other is to earn $1,250 and invest in a traditional IRA and pay no tax on the money now. We’ll assume a 20% tax rate. Let’s also assume a 6% growth rate for 25 years with no future deposits. At the end of 25 years, your Roth IRA would be worth $4,049 and would be tax free. Your Traditional IRA would be worth $5,061, but you would only receive 80% of the value upon withdrawal, which magically equals $4,049.
So where is the benefit? Perhaps you are thinking that you will be in a lower tax bracket when you retire. Not to burst your bubble, but I have yet to see that happen when every dollar of your pension is taxable and if every dollar you withdraw is also taxable. Even if marginal tax brackets remain the same, you will no longer have the deductions you may have now, such as your pension contribution, your deferred comp contribution, deductions for your children and mortgage interest.
Let me ask you a question…do you think taxes are going to go up? Stay the same? Go down? For every 1% increase in your marginal tax bracket, you will lose $50 more from your tax deferred account! Nobody told you the rest of the story, but they are hollering “Jump, jump, jump!”
I’ve saved the worst for last. Look into the future a few years. Picture yourself at age 70-1/2. Quick, can you tell me the month and year of when you turn 70-1/2? I hope so, because if you fail to take a mandatory distribution from your tax-deferred retirement account, the IRS has saved it’s largest penalty, FIFTY PERCENT, just for you! Are you starting to turn a deaf ear to those hollers yet?
Is there hope? Of course there is! Call today to 216-621-4440 and schedule an appointment today with one of our representatives at Blue Line to discuss your options for creating tax-free income. Roth IRAs, Roth conversions and alternative tax-free income options exist for all income levels. If you need to see the tax impact, we have a tax-preparer on staff. Now, aren’t you glad you listened to your mother?
Filed under: Taxation of Retirement Benefits, Taxes Tagged: | IRA, qualified plans, retirement, taxes
