There is a lot of talk and much advice from financial advisors and “certified” planners to put your money in tax deferred accounts. The prediction behind this advice is that you will be in a lower tax bracket when you retire and access the money. But here is the reality: that is not what usually happens. In fact, I have yet to meet anyone for whom this was true. This is simply bad advice and I can give you 4 reasons why.
First, most people have fewer tax deductions in their golden years. The house is closer to, if not completely paid off, which erases the biggest tax deduction (mortgage interest) for most individuals. Additionally, the kids are grown and the child tax credit is gone. These two things usually push people into a HIGHER tax bracket.
Second, talk to anyone you chose, be it trusted advisor or stranger in the checkout line at the grocery story, and ask them if taxes are going higher or lower in the future. Everyone I speak to not believes taxes are going higher. With rising taxes it is not likely you will be in a lower tax bracket.
Third, assuming taxes do not go up, in order for you to be in a lower tax bracket, you will have to live on less than what you are living on right now. Does the prospect of living on 80% of what you make now sound appealing?
Fourth, Inflation itself will put you in a higher tax bracket. You pay taxes on how many dollars you make, not on what those dollars can buy. Just to maintain your current lifestyle in the future you will need more dollars. Do you think there will be any inflation in the future and if so do you want an inflation adjusted life style?
This brings me to the most important question about your money. It is a simple question, but the long term outcome will be drastically affected by how you answer. The question is, do you want to pay taxes on your seed or your harvest?
What kind of cryptic question is that? Imagine for a moment you are a farmer. It is February and bitterly cold outside. It is 04:00 and there is a knock on the door. It is the local tax collector. He tells you he is going to ask you one question and only ask it once. You cannot change your mind after you first answer it. He asks, “Do want him to take the government’s percentage of your seeds right now or take a larger percentage portion of the harvest which will come from those seeds?”
How you answer the most important question about your money will determine if you are willing to endure the pain it requires to obtain your dreams.
You should pay your taxes now – at the lowest rates you will experience – so you can enjoy more later.