Broker Check

A Delicate Balance

March 25, 2021

It can be difficult to strike a delicate balance of living well today, while still planning for our future. Early in our lives, we can afford to make financial mistakes and it doesn't effect us much.  Once we hit your 50s, financial mistakes can derail our plans and force us to put our lives and our retirement on hold.  

Here one decision (of many) that may come back to haunt us in our 80s.  Deferring taxes.  

Unless you have a ROTH IRA or ROTH 401K retirement plan, you have a silent partner in your retirement plan—the I.R.S. 

With a traditional IRA or 401(k), your contributions are pre-tax and your earnings are tax deferred. That means you don’t pay taxes until you take the money out. The I.R.S. is waiting patiently for you to cash in your retirement plan so they can get their “cut” in the form of income taxes. Since we have no control over our tax brackets in retirement, this “cut” could keep growing larger over time. When saving for retirement, many people assume they’ll be in a lower tax bracket when they retire. Not so fast!

Remember that in the 1970s, the top marginal tax bracket was 70%.  Then in the early ‘80s, it dropped to 50%. Today the top marginal tax bracket for earned income is 39.6%. We have no idea where tax rates will be 30 years from now. It’s easily conceivable that taxes could increase in the future. In that case, you may regret not having invested in the Roth IRA or ROTH 401(k) versus the traditional pre-tax 401(k)—and you just might kick yourself for not converting that IRA, paying the taxes upfront and getting it over with.

It is possible to strike a balance on taxes.  Call or email to set up a time to review your retirement tax strategies so you can feel confident as you plan for retirement.