You could be planning Uncle Sam’s retirement.

 
"It you think that deferred taxes will save retirement dollars, think again... It's sad but true: Traditional qualified plans are the best savings bond Uncle Sam ever came up with for himself.” (Missed Fortune 101, p.37,43)

Most people plan their retirements using tax-advantaged funds such as IRAs, 401Ks, etc. These types of funds are what we call tax-deferred funds. Its where the government entices people with tax advantages on the front end. Why would you be doing anything different? This is what almost every American does. This is the misconception that most Americans have. We think that deferring taxes for a later unforeseeable time is better because as we get older our tax brackets automatically shrink because of age and experience. Americans again are also under this misconception thinking that they will be in a lower tax bracket when it is they decide to retire.

“Because of a lack of exemptions and deductions, most retirees find themselves in the same if not higher tax bracket. This is the sad but hard truth that most retirees find themselves in when they decide to retire “cursing the day they started their plan because of the amount of tax they pay on the back end, versus the taxes they save on the front end.”

“Within the first three years of retirement, they will pay back to Uncle Sam every dollar they saved in taxes over thirty-five years on contributions. They wonder, “Were we planning our retirement or Uncle Sam’s?”
(Missed Fortune 101, p.38,43)


"Taxes save now, pay more later."


“ It’s sad but true: Traditional qualified plans are the best savings bond Uncle Sam ever came up with for himself. Let’s look at a simple example to see why. Jim and Mary Followthecrowd represent a husband and wife who each started setting aside $3,000 per year into IRAs or 401(k)s when they were age 30. They thought this was a good idea because, together, they were saving $6,000 before tax. It really only required them to give up $4,000 in a 33.3 percent tax bracket because Uncle Sam was contributing the other $2,000 in tax savings. Jim and Mary were excited every year because they were saving $2,000 in otherwise payable income taxes-$2,000 per year over thirty-five years means they saved $70,000 in tax on their contributions of $210,000. They are thrilled because their $6,000 per year investment grew to the $1-million mark in thirty-five years and one month. Now they’re ready to retire and enjoy the harvest of the fruit they’ve nurtured. If Jim and Mary were to make interest-only withdrawals (to not deplete their $1-million nest egg), their annual interest income would be $75,000, assuming they continued to average a 7.5 percent return. Lo and behold, they find that this income, on top of their Social Security and other income (plus the fact they have very few tax deductions in retirement), keeps them in a 33.3 percent tax bracket. So on the $75,000 annual income coming from their IRAs and 401(k)s, they end up paying at least $25,000 in tax, and they get to keep and spend only $50,000.

Within the first three years of retirement, they will pay back to Uncle Sam every dollar they saved in taxes over thirty-five years on contributions. They wonder, “ were we planning our retirement or Uncle Sam’s?” Not only that, but if Jim lives twenty years to age 85 (life expectancy for a 65-year-old male), they will have paid $500,000 in taxes on their IRA and 401(k) distributions, versus the $70,000 they saved over thirty-five years on contributions!” (Missed Fortune 101, p.45)