Specific sections of the I.R.S. tax code give taxpayers breaks for contributions to IRA’s, 401(k)’s, TSP’s, 403(b)’s and other similar funds.
Charlie Jewett from Renovating Retirement says that by simply allowing these plans to exist in their current form, the I.R.S. is in effect encouraging people to invest in them.
“They are advising you to invest in the max allowed,” says Jewett, “thus deferring your tax until the future when you will be in a lower tax bracket, while at the same time giving you a tax write off in present.”
But Jewett points out that most people fail to consider whether taxes are going to go down or up in the future.
Most people say they believe that taxes will go up.
“So if you think taxes are going to go up in the future,” asks Jewett, “why on earth would you postpone paying taxes now on your savings and investments until a future date when most all evidence points to taxes having to rise–even double–in the future?”
Other factors play a role in deferred income strategies, such as matching employer contributions and projected income levels during retirement.
But taking control of your financial future means considering as many angles as possible, including tax rates, when planning for retirement.