I call USDebtClock.org the scariest site on the Internet. Watching the numbers spin so quickly can be quite mesmerizing, but the sheer magnitude of them is quite terrifying.
While it may not seem like it in your everyday life, tax rates are at historic lows. With low tax rates and insurmountable debt that is rising rapidly, in my opinion, there’s only one reasonable expectation for the future of tax rates: UP. WAY UP.
Despite this backdrop, the overwhelming amount of savings goes into qualified accounts: pre-tax 401k/403b/457 plans and traditional IRAs. This amounts to avoiding paying a low tax rate now to save money in the present only to end up paying what will almost certainly be a much higher tax rate at the worst possible time: in retirement when the person has no income to help themselves out.
I don’t know the first thing about corn farming other than I’m quite certain that I’d be terrible at it, but let’s pretend that you’re a corn farmer and it’s planting season. As part of your preparations, you acquire the necessary seed corn so that you can plant your fields. At this time, a man from the IRS shows up and says, “Now, you have two choices: first, you can pay the tax on your little bag of seed corn right now, or I can come back during harvest season and you can pay the tax on all of the kernels on all of the ears on all of the stalks in your field.”
As he walks off, he turns back and says to you, “Oh, and during the summer, tax rates are going to go up – way up.”
So which sounds more palatable?
- Paying tax on just the seeds at today’s historically low rates, or
- Paying tax on a huge harvest at dramatically higher rates?
I have been telling this story for a number of years now, and I have yet to have anyone respond that they want to pay high tax rates on a silo of corn kernels when they could have paid a low tax rate on a bag of seeds.
And yet the majority of those saving for retirement are not acting accordingly. They’re delaying the tax, watching their money grow, and will then be taxed during their harvest season – retirement – after the tax rates have exploded and their portfolio has grown.
With this background of the dreadful fiscal situation of the United States and what’s nearly certain to come in the future, I help clients save such that they will have tax-free assets and tax-free income in retirement. Most people are familiar with asset diversification but very few think about tax diversification and I make folks aware of this key issue.
When taxes are minimized, that means more spendable income which in turn becomes a safer, more secure retirement with an enhanced lifestyle.
I’d be very happy to help you achieve your best life by minimizing your tax bill.