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Defined Contribution Accounts (IRA, 401k, 403b, etc.) |
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Ability to Recapture Lost Income |
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Enhanced Transaction Privacy |
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Tax-Free Wealth Transfers |
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Protected From Creditors/Lawsuits |
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Subject to Stock Market Risk? |
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Accessible Anytime Without Penalty |
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How Traditional Financial Planning Could Increase Your Tax Rate.
Any discussion regarding your retirement savings must begin with taxes. For it is the subject
of taxation that defines your ability to fund a comfortable retirement above all else. To begin this process of looking
ahead, we must first look to the past. The following graph displays the highest marginal tax rates in U.S. history
since 1913 - the year in which the IRS was founded.
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| Highest Marginal Tax Rate 1913-2009. |
From the
chart above, we see that tax rates in the current environment are near their historic lows. Because tax rates tend to
rise and fall together across brackets, we will use this chart as a measure of rates since the inception of the income
tax in 1913.
Given current low levels of income taxation, is it reasonable to assume that tax rates will go significantly
lower than current levels? With history as our lens, and looming federal budget tax increases as our guide, a conclusion
can be reached that current investors are deferring taxes at a time when tax rates may be positioned to steadily climb.
In economic terms, a
dollar earned today is more valuable than a dollar earned tomorrow. This is primarily because of the effects
of taxes and inflation. Therefore, by extension, a dollar saved today is more valuable than
a dollar saved tomorrow.
The economic reality of tax deferral is that future tax increases become virtually guaranteed, thus
costing the investor more money at a time when tax free income is vital. That simple economic reality
may be the best argument against a traditional defined contribution plan. Despite the continued perception that savers
will be in a lower bracket upon retirement, overall tax brackets are likely to be higher in the future.
We will have a further
discussion on this page uploaded shortly! Please be patient with us. Thanks!
