IRA's—THE TAX TRAP

What you hear from most professionals – or the prevailing opinion – is to maximize your qualified plans, 401k and IRA, Individual Retirement Account, to take advantage of current tax deductions!

Here’s the story. When the IRA was “invented” the congress/IRS wanted to encourage Americans to save for their future. The handwriting was on the wall regarding Social Security. Social Security was never designed to be the end all of retirement plans. Just a bit of a safety net. But what happened was that many Americans stopped saving money and ended up counting on Social Security alone for their retirement. This led to a senior population that was definitely NOT enjoying their golden years.

So, congress thought that if they enticed us to save money, by giving us an immediate tax deduction, and tax deferred growth that would encourage us all to save. And it did.

Sounds pretty darn good so far doesn’t it. But, here’s the rub!

When we start taking the money out of these retirement plans and congress has imposed a date by which we must, every dime we withdraw is taxable at our new, current tax bracket. That is not only every dollar we contributed but all the money our investments earned.

Now, think about this and think about it and think about it. We have heard for many years now that our retirement system, Social Security is broken. There is no money; there is no pool of cash ready to be tapped. If that is the case, then how are we going to get paid? Where will the money come from to pay all the people lining up to collect their well earned, well deserved, Social Security check?

Here is what I have concluded. TAXES! The government will have to raise taxes. Maybe, right now, you are in the lowest tax bracket you will ever have. You are contributing to your 401k or IRA and deferring your income and the taxes due on that income to whatever tax bracket the government/IRS decides to impose on you at a later date! In other words, deferring your current known tax to a future unknown and possibly higher tax.

Let’s remember. You can’t defer these taxes indefinitely. You are required to start withdrawing at age 70 ½ so the IRA can start collecting their money. This naturally leads to another discussion. Maybe you if you are 591/2 you should bite the bullet, start withdrawing now and pay the taxes. Every situation is different but maybe it would be wise to consider. You don’t have to spend it, you could simply reinvest into an “after tax account”.

A concept worth considering don’t you think?