Retirement and Taxes: Are You Financing Your Future, or the Government’s?

by | Jan 14, 2016 | Personal Finance 101 | 0 comments

You probably don’t enjoy paying taxes — no one does. And it’s frustrating to constantly wonder if you’re paying more tax than you legally have to. You certainly wouldn’t pay extra tax just for the fun of it, would you? Are you financing your future, or the government’s?

Taxes are here to stay, so it’s smart to find ways to reduce your federal tax burden. Interestingly enough, when Congress first passed the 16th Amendment and imposed an income tax in 1913, it was supposed to be a temporary thing, and the marginal rate was around 6 percent. After the World Wars, though, the government retained and raised that marginal rate to finance the war effort, and by the 1960s, the rate had ballooned to more than 50 percent.

If you look at the returns from those people, like your parents, who were paying taxes in the 60s and 70s, they had an astonishingly high marginal rate — upwards of 80 percent. However, they benefitted from a number of deductions that were in place. That made the actual tax rate that a middle-class family paid closer to 12 to 20 percent.

In the 80s, marginal rates went down to more reasonable levels, but the deductions that were standard for most families disappeared. That had the effect of actually increasing what your average taxpayer had to shell out to the federal government.

So what does this all mean for you as you plan for retirement? History proves that the government will change the tax codes whenever they want. This makes plannning for the future challenging. Question: Do you really want to defer taxes on your savings when you  have no idea what the tax laws are going to be in the future? That seems like a risky prospect.

The government wants your money, and it will find a way to get it from you unless you can do some savvy planning. The government sponsors several types of plans to help you save money for retirement, including 401(k)s and IRAs. However, the day you initiate your qualified retirement account is the day it will suffer its greatest loss due to taxation, not because of the downward trend of the stock market. 100% of your qualified retirement income becomes taxable.

This is definitely an area where you can use some sound financial advice about your different options for retirement savings. Making smart decisions now could save you thousands of tax dollars later.

Contact us for more information on securing your lifestyle for retirement, without paying unnecessary taxes to Uncle Sam.