Save For Retirement The Smart Way
Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
If Congress can pay farmers not to raise crops, why can’t we pay Congress not to raise taxes?
Taxes are with us from the time we start working, through retirement and beyond – and they’re always increasing. It’s hard enough to make ends meet, but we also need to save for retirement. I don’t know the ‘best’ way to save, but I can tell you the ‘smart’ way. Here are the three scenarios:
The ‘Taxable’ Way: If you start with a penny, and double your money every day (Start with $.01, day 1, $.02; day 2, $.04; day 3, $.08, etc.), in thirty days you would have $10,737,418.24. Nice, right? – if the money were tax free. But if you had to pay taxes on that each day as you earned it, instead of having $10,737,418.24, a single person, living in New York City, would end up with less than $600,000. In other words, if you save in a taxable account, or one that is taxed-as-earned, you’re going to have a lot less. Conclusion, saving for your future in something that is taxable, like a CD or money market, is not the way to go.
The ‘Tax-Deferred’ Way: Many of us use tax-deferred savings, like the IRA, 401(k), or a pension or profit-sharing plan. In this case, you are taking advantage of lowering your taxes now, that is, postponing the taxes now, in favor of paying taxes later at some future, unknown tax rate. And what are the rates going to be in the future? Certainly not lower. You would be like a farmer who doesn’t pay tax on the seeds in the spring, but has to pay tax on the full harvest in the Fall. I see retirees in my office who end up with more income in retirement as all these tax-deferred plans bloom –like your retirements, annuities, and don’t forget that you have to pay on a portion of your Social Security benefits, up to 85%! You end up with about the same, or even more income in retirement – and paying taxes at a higher rate to boot.
The ‘Tax-Free’ Way: Referring to the ‘taxable way,’ if the earnings were ‘tax-free,’ you would have over $10 million more! There are various tax-free ways, but the one that most of us can use, is the ‘Roth IRA.’ The contribution is made with after-tax income, but:
- It accumulates tax-free
- You have access to the principal at any time without any penalties from Uncle Sam
- Upon retirement, you can then withdraw the earnings tax free
- Plus when you pass away, this money goes to your heirs tax-free
We are now in the “tax planning season.” Review your options with your tax preparer. Don’t wait until “tax preparation season.”
Questions? Call 718.332.1040 or email JSReisman@TaxHelp1040.com.
And speaking about Congress, let’s simplify the tax code by requiring them to prepare their own tax returns.
Have a good week.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.