Buyer Beware: A Traditional IRA Could Be Your Worst Tax Nightmare

Buyer Beware: A Traditional IRA Could Be Your Worst Tax Nightmare

Tax season is once again upon us and, among other things, it's that time of the year that experts give us so-called tax saving strategies. Of course there are some great ideas that may end up benefiting you, but in my humble opinion – which is based on real-life experience with real people facing real situations – some of these tax saving strategies may, in fact, end up doing the exact opposite and instead cost you big time in the long run.

One of the notoriously popular yet equally dangerous strategies is encouraging everyone to fund a traditional IRA in order to “save” money on your tax bill. Sounds good, but will it really save you money?

While it is true that contributions to traditional IRAs are deductible, and the gains you make during accumulation years are not currently taxable, that's not the end of the story by any measure.

The more compelling story is what happens down the road when you begin accessing money from your traditional IRA during retirement. Every single cent of that money will be subject to income tax at whatever tax rate is in effect at that moment in time – and who knows where tax rates are headed?

As I explain in greater detail in my books 5 Mistakes Your Financial Advisor Is Making  and Is Your 401(k)  a Trap?, the indisputable fact is that with a traditional IRA, you are simply making a decision to pay taxes in the future, which would be a good decision only if you knew for a fact that your tax rate would be much lower than it is today, something I think we can both agree that even the President of the United States doesn't know – not to mention that he cannot honestly promise anything in this regard. So, in effect, it’s a complete gamble.

Here’s the piece that seems to allude the so-called experts. Even if today's tax rates do not change, there's still the real possibility that you'll end up paying more taxes when you retire, simply because you'll most likely have fewer deductions and exceptions than you enjoyed during your working years. For example, your dependent children will likely be adults by then, your mortgage would likely be paid off or almost paid off, and you’ll no longer be making deductible contributions into a 401(k) or your traditional IRA. All of which will imply one thing – a potential increase in your taxable income, even though your gross income may have dwindled. Talk about the perfect storm for getting clobbered by taxes.

This is something I see happen to real people in real life every single day. I'd like to suggest a very simple way for you to test the potency – and also the shortsightedness – of this strategy. Find someone who’s retired and followed this kind of advice and ask them how their tax situation is panning out in retirement. Are they actually saving money on their taxes? Also ask him or her if, given the chance of a do-over, he or she would go the same route.

If you are really looking to reduce your tax bill in the long run, you may need to look beyond a traditional IRA. Hopefully you are hearing me loud and clear.

Happy retirement.

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Want real, fact-based information that will give you the whole picture, rather than assuming the IRA is your best option? Contact us so that we can help you to objectively evaluate your current situation and make a plan that will yield the results you want. Visit LaserFG.com or call 877.656.9111 right now to book your complimentary session.