How Will Tax Changes Affect Your 401k or IRA?
“A prudent man sees danger and takes refuge,
but the simple keep going and suffer for it.” (Proverbs 22:3)
Do you believe taxes will go either up or down in the future? We ask this of all our clients, and almost every single one of them believes they will increase. When you look at the massive amounts of money that our government spends each year that it does not have by borrowing from its future tax revenues, many people can come to no other conclusion than that eventually the government is going to increase taxes quite dramatically.
By the way, it’s quite easy to “prove” that higher taxes lead to lower government revenues over time due to the inefficiencies it creates in the economy (most efficient is around 15-17%), but this reality is always lost on politicians who seem to prefer the idea of spending more of your money now.
We don’t know the future of taxation in this country. If you believe that tax rates will go down in the future and you are willing to bet on that, then you can ignore this point because it would be invalid.
If, on the other hand, you believe taxes will rise, and you are putting money into a QP (401k, IRA, etc), you need to seriously ask yourself, why are you doing this? Are you simply doing this because everyone else is doing it? Is that a good reason?
Once again, why is everyone else doing it? Who most benefits? Who convinced the government to set up a plan that has you sending money to the financial institutions that you cannot touch for decades, but that these institutions charge fees on for all this time? Who most benefits from these plans?
What sense does it make to put money into an account so that you can avoid paying it at 25-35%, not have use of the money for 20-40 years, and then pay taxes on that same money at 40-90%? (These are completely arbitrary and made up numbers. We use 90% because that’s the highest the tax rates have ever been and it’s hard to imagine them going any higher than this, but who knows?)
To look at the history of the income tax in American is a startling thing. In 1913, our government convinced the American people to change the constitution (because the founders of our country felt that an income tax was Un-American and expressly forbade it!) so that they could charge this tax. To convince the people to make this huge shift in policy, they told the American people that this tax would only be on the “rich” and never be more than 8%. That lasted about 3 years and then it started climbing. If you look at the chart of top tax rates, you will see that where we are today is very low compared to where the tax rates have been throughout most of the history of this tax.
Again, what sense does it make to have money in a plan to avoid paying taxes at a low rate and then pay them later at a higher rate?
This is _Part 17_ in the series titled The Trunk. To continue with this series, click on Pt 18. To use this as a growth tool, please read Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12, Pt 13, Pt 14, Pt 15 and Pt 16.
Photo credit: Empowerment Blogger