Do you know what tax bracket you’re in? Do you know what your tax bracket will be in 20 years? I know for most of us, taxes aren’t a fun topic. We only deal with them when we’re forced to. But, stick with me for a moment…this is actually about your savings.
Every year, us good citizens give Uncle Sam a slice of what we earn. That is unlikely to change, but what does change is how those taxes are structured and that affects how big a slice we are expected to hand over. It’s easy to know where things stand right now, but when you’re saving for retirement, you have to consider how taxes might change between now and when you start using your saved funds.
Contrary to what many people believe, your IRA, 401(k) and other retirement accounts are not tax-free, they’re tax-deferred. This means the money grows without paying tax along the way, but any money you withdraw will be taxed according to whatever the tax laws are AT THAT TIME. If you’re in a higher tax bracket later, you’ll pay more then than you would now. If tax rates are raised, again, you may be paying more then than now. The problem is, there’s no way to know what future generations of Congress may define.
There are accounts that are tax-advantaged, meaning you pay tax on your income now and then use it to invest in these strategies. In these accounts, your money can grow tax-free and then when you use the funds they are also tax-free as long as you stay within the IRS rules. Maybe you should consider shifting some (or all) of your 401(k) contribution toward tax-advantaged strategies to diversify your portfolio across tax categories, not only across investment vehicles.
If you have questions, reach out to us. We teach people what options they have and guide them to actually implement solutions that work to meet their goals and needs. Don’t wait until you get a tax bill you don’t like to start looking at your situation.