Monday, April 11, 2011

More IRA, Less Tax – Act Now (If You Desire to Be Potentially Clobbered in the Future)

More IRA, Less Tax – Act Now (If You Desire to Be Potentially Clobbered in the Future)

With Tax Day quickly approaching, it’s not out of the ordinary to hear all sorts of “expert” advice on how taxpayers can outsmart the IRS. A great number of tax preparers, CPAs, and other advisors are busy convincing retirement investors that it’s a savvy move to contribute to an IRA, because by so doing they’ll “save” on taxes. In fact, today’s column is motivated by an ongoing major advertising campaign by a national financial institution/bank. Their tag line states: “More IRA, Less Tax, Act Now...”

That might sound pretty catchy, and we know it is an emotional hot button. Or is it, really? As someone who works with real-life retirement investors, half-baked theories like this turn my stomach because all they do is create ticking tax time bombs for unsuspecting investors. Yes, it’s true that by funding an IRA you’ll pay less tax today. But is that the end of the story? Of course, not! It’s just the beginning of potential tax nightmares later on.

You see, these IRAs simply defer (or postpone or delay) the due date for those taxes until you begin withdrawing the funds for your retirement, either out of your own accord or by IRS mandate, once you reach age 70½ . At that point, you must pay taxes on every single dollar you pull out of that IRA. Here’s the kicker, though: At what tax rate? The simple answer: Whatever tax rate is in effect at the time those funds come out.

Proponents of this short-sighted IRA theory might argue that since you’ll be retired – with no mortgage to pay and no children to support – you’ll need only a little income (i.e., very little income) compared to what you need today. It’s therefore only logical that your tax rate also will be much less, thereby beating the IRS at its own game. This is seriously their claim! I think it’s ridiculous, at best – and I really don’t want to digress. But on the issue of “How much retirement income will I need?” let me say this (again, from real-life experience): That line of thinking might hold true, but only for folks who intend to retire with front-row seats to their TV sets. If you intend to have any kind of life, “very little income” just isn’t going to cut it.

Have you ever wondered why the vast majority of retirees who own these IRAs keep complaining, year after year, about being butchered by the IRS? With no mortgage interest deductions (because it’s paid off), no dependent exemptions (because the kids are now responsible adults claiming their own exemptions), and no more IRA contributions (because harvest time has arrived), your three major income-reducing items completely evaporate overnight. As a result, even with a much lower total income, these retirees’ taxable incomes skyrocket. And the really bad news here (or great news, if you’re Uncle Sam) is that taxes are based on taxable income. Pretty interesting how things work, isn’t it?

And, oh, did I mention that every dollar that comes out of these IRAs (whether voluntarily or mandated by IRS rules), directly impacts how much your Social Security checks will be taxed also? Talk about a double whammy!

I know, you thought you were doing the right thing with your IRA, and I don’t blame you, given the advice you likely received – but here’s one more very important variable to consider before jumping on the IRA bandwagon. Remember that the actual amount of tax you end up paying is a function of your taxable income AND your tax rate. It’s no secret that today’s tax rates are a “temporary extension” of “historically low” rates. So, where do you believe rates are headed after the “temporary” period ends (in the face of our humongous national debt, not to mention the astronomical issues facing Medicare, Medicaid, and Social Security)? One way, of course: UP! Is it really a great idea to delay paying taxes today on your seed money, only to pay them in the future on your entire harvest? Think about that!

What's the Alternative?

Wouldn’t it make more sense to go ahead and pay the tax on your seed money at today’s historically low rates? Then tuck it away in accounts that, going forward, you’ll never, ever have to worry about paying any income taxes on again (including all your gains)? And you’ll be in absolute control (without the IRS telling you when you may or may not touch those funds)? And regardless of how much you withdraw, it will not impact taxation of your Social Security checks in any manner? And when, at death, you pass the remainder on to your beneficiaries, they will receive the inheritance completely income-tax free, also? Wouldn’t most Americans consider that a smarter, better approach?

At this point, you may be starting to understand why I said this IRA theory makes my stomach turn. If you don’t quite get it yet, that’s okay – but please print and keep a copy of this column somewhere, because sooner or later, you’ll understand. The thing is, the alternatives I just generally described are available in the exact same tax code that others have read, only to come up with the not-so-smart idea of IRAs.
Please contact a representative at Laser Financial Group today to schedule your complimentary consultation about how to realistically preserve the most funds for your retirement, without having to pay a higher tax rate “later on.” 310.949.4449 or

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