When planning for retirement, many of us have been conditioned to save using tax-deferred plans like an employer-sponsored 401(k) or IRA. The idea behind these accounts is to allow you to put away untaxed money to save for retirement. Once you’re ready to retire and withdraw the funds, you’ll hopefully be in a lower tax bracket and owe less taxes on your savings than you would have while working full-time.
While making contributions to a tax-deferred investment portfolio to save for retirement isn’t a bad thing, there are some limitations. Tax-deferred accounts operate on two assumptions. First, you’ll be in a lower tax bracket when you retire. Second, future tax rates will be lower than they are today. The truth is, there’s no guarantee either of these things will happen!
If I were to ask you whether or the tax rate is likely to increase or decrease over time, what would you say? Chances are you’d say they’ll increase. As history shows, you’d more than likely be right. So why defer taxes at a lower rate now, only to pay more in the future?
Deferring taxes is a lot like having a rich relative who writes you a check for a loan and tells you not to worry about the repayment terms until down the road. When he’s ready to be reimbursed, he’ll let you know the terms and repayment amount. Does it make sense to accept that check without knowing how much it really costs? Absolutely not!
The Importance of a Diverse Retirement Saving Strategy
If your retirement savings strategy is to only utilize tax-deferred accounts, you may be setting yourself up to pay more to withdraw your funds. In addition, some retirement withdrawals can also impact how much your Social Security income is taxed. In order to successfully plan for retirement, we need to look let go of conditioned thinking and start thinking outside the box.
The best way to take control of your financial future is to start asking the right questions. Here are three things to consider:
- What happens if I need to access my money before I turn 59 ½?
- What happens if I’m not in a lower tax bracket at retirement than I am now?
- What if I don’t need to withdraw my funds when I turn 70 ½?
Knowing the answers to these questions is an important part of planning for retirement. With a clear understanding of your current financial picture and goals for retirement, you can better prepare yourself its arrival. One way to do this to employ both tax-deferred retirement accounts and nontraditional methods like the Infinite Banking Concept. Diversifying your portfolio to include a combination of financial products is the best way to ensure you can retire the way you always dreamed.