Tax-Deferred is NOT Tax-Free!!!

It seems - to me - that a very tiny percentage of financial “gurus” understand the difference between tax-deferred and tax-free. Why? Check out my last post. If you are - sort of - crazy about qualified retirement plans (401(k)s/IRAs), the facts about to be revealed might disturb you.

I am pretty sure you’ve heard this standard advice given at every single 401(k) meeting, by conventional financial planners, conventional CPAs, conventional CFPs and the like:

“When planning for retirement, take your tax break toady while you are earning a higher income. After all, when you retire, your income will be lower, hence your tax bracket.”

My Comment: Those who give this advice don’t live here, on this planet. Seriously!

Okay, let’s take it S-L-O-W

The great thing about tax deferral is that your money gets to compound overtime and you don’t have to pay taxes on that growth – YET!

But, to defer is to put off until a later time (future). And, future is defined as an expected time to come. Therefore, all these programs are doing is putting off taxes to when the funds are withdrawn, or forced out at age 70 ½. (I’ll explain the forced out part at a later date).

Dear reader, - GET THIS - 100 percent of the money in these accounts is taxable, sooner or later. Understand that it doesn’t matter how smart or well connected your financial adviser may be, he/she CANNOT assure you that: you’ll be in a lower tax bracket when you begin taking withdrawals or are forced to at age 70 ½. If you’ve already been given this promise (or even implied), please, FIRE your adviser! And feel very, very good about it.

The one thing you can bet your house on is that the government pays for stuff with tax revenue. Do you think that when Uncle Sam needs more money, he pauses (for a second)? To consider the fact that someone may be retiring -so- increasing taxes might erode their income? I hate to tell you he doesn’t give a DAMN!

The federal government (Democrat, Republican or whoever is in power) MUST pay for Social Security, Medicare, and the largest federal debt in history. With what? From where?

According to David Walker, former Comptroller General of the General Accounting Office, “to balance the federal budget by 2014, taxes on corporate and individual incomes would have to increase by 38 percent or Social Security and Medicare would have to be cut by 55 percent”.

Here are a few questions for you (and your financial adviser/expert) to pounder:

If you were the federal government which of the two options would you pursue? – INCREASE taxes by 38 percent or CUT Social Security and Medicare by 55 percent?

Here’s another simple question. If you were to take a wild guess - regarding the direction of future tax rates - where would you think they are headed? Everyone (I have ever asked this question) believes higher – yes EVERYONE!

Yet, many allow themselves to be convinced by so-called financial advisers to postpone their tax liabilities. (DON’T forget, those advisers/experts don’t live on this planet. So, they don’t have a clue as to what is going on here).

Next question: If you were a farmer, would you opt to postpone the tax on the purchase of your seed but pay tax on sale of your harvest (which is the 401(k) idea), or would you rather pay tax on the seed and sell your harvest without any tax on the gain (non-qualified alternatives)?

On the planet that we live on, given the FACTs above (and the perfect storm), I’m here to tell you, it’s an ILLUSION (and quite frankly absurd) to think that future tax rates are likely to be lower.

But hey, you and your financial adviser (or whoever) are free to assume whatever you want (I like freedom of choice too)! I – really - hate to end this way but, your IRA/401(k) may be setting you up for a very nasty surprise!