I want to bring you a message about taxation today. There are a lot of tax strategies and schemes out there – “helping people save today by deferring current taxes until later.”
Considering the law of compounding…that does make sense.
If you save that dollar today and invest it in something that produces a great return, then sure, you’re better off. In some cases that works out, but it depends on what you are investing in – or if you’re actually investing at all.
The typical tax-deferral mechanisms are 401(k)s and IRAs. The money you put in these constructs grows tax-deferred (not tax-free) until you take it out after age 59 ½ – and you pay taxes on it then.
It’s sounds like a great idea, but I have a few problems with this:
- You’re tying your money up in a prison, where you can’t get to it without paying a penalty if a better opportunity comes up.
- The tax rates will likely be much higher by the time you get to 59 ½. Our country is in so much debt and is becoming more socialistic, so my heavy assumption is that tax rates will rise – and I don’t want to pay taxes on a huge growth of money at a much higher rate than today.
- When you put your money in a 401(k) or another tax-deferral scheme (or perhaps “prison” is a better word!), what is your real rate of return on that investment? Most people put their money in index funds or the stock market, gambling it away for the promise of great returns.
Most of the time, those tax-deferral mechanisms do not outrun taxation at the back end!
I know for a fact that in today’s world, I can grow my money faster and outrun current-day taxes outside of a tax-deferred environment. I’m not saying that tax-deferral is the worst thing in the world, but you’ve got to think about it before you follow the majority – because the majority isn’t always right.
To your freedom!
David
P.S. I’m holding a 2 day workshop on March 27-28 for dentists who want to beat the average retirement timeline. Reserve your seat now: www.freedomfounders.com/workshop, and use promo code ACTION to take $300 until Nov 1!
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