Wednesday, May 5, 2021

Crystal Balls Don't Work


Have you been worried by some of the financial gurus who are out there telling you that all that money you saved for retirement is not really yours?  That Uncle Sam is ready to take his share in taxes, so you are not going to be as well off as you think in your golden years?

I understand what they are saying; I just don’t buy into it—not for everybody’s situation, at least.  Let’s review the facts.

Most people save for retirement via a workplace plan like a 401(k) or through a personal account, like an Individual Retirement Account (IRA).  Most of those accounts are regular, or non-Roth accounts, meaning that money that is deposited is not taxed before it goes into the account.  This is a nice upfront tax savings.  But the money IS taxed—along with the years’ worth of growth in value—when it is withdrawn in retirement.  The usual pitch for these plans is that in retirement you are likely to be in a lower tax bracket, so it’s better to have it taxed then rather than in your peak earning, high-tax-rate years.

A Roth account (either a 401[k] or IRA), on the other hand, does not give a tax break at deposit.  The money going into the account has already been taxed, but when it is withdrawn in retirement both the initial deposits and the years’ of growth in value are NOT taxed.  The recent selling point for these accounts is that taxes now are at historic lows after the Trump tax cuts of 2017, and they have nowhere to go but up, especially in a Democrat-controlled government intent on rolling back Trump policies.  So you should—the logic goes—deposit money now into a Roth account or even switch money from a non-Roth account to a Roth account and pay the resulting tax bill while the rates are low.

Again, I understand the rationale, but two factors give me pause.  First, I don’t like the implicit message that people have been saving unwisely by investing in non-Roth accounts.  I salute anyone who has the foresight to save for retirement in any type of retirement account.  For some of us, when we first started saving there was no such thing as a Roth account.  And even now, not all employers offer Roth 401(k) accounts.  So should I direct my nest egg into a Roth IRA and give up the employer match I get when I deposit money into their sponsored 401(k)?  Give up an immediate 50% to 100%  return on my investment?  I don’t think so.  Besides, there are strategies for minimizing the tax burden in retirement.  All is not lost if you don’t have a Roth account.

But the second reason I don’t buy into the Roth hype is that I think part of the argument in ts favor is flawed.  Suppose, for example, I use some of those tax avoidance strategies I referred to and paid little or no taxes on the withdrawals from my non-Roth account?  Then I not only avoided taxes upfront but dramatically reduced my rate—maybe even to 0%--upon withdrawal and maybe end up not paying any taxes on the deposits.  (Of course, if I had a Roth account I wouldn’t have to jump through hoops to avoid taxes, so there IS that.)  And who is guaranteeing that tax rates are only going to go up?  The headlines yesterday quoted President Biden saying that under his tax plan, Americans earning less than $400,000 “wouldn’t pay a penny in taxes”.  I think that was a verbal slip-up on his part; he meant to say “a penny more in taxes”.  (What a difference a word makes!)  True or not, it shines a bright light on the uncertainty of the future.  Can you (or the talking heads on TV) guarantee that YOUR tax rate will go up in retirement?   Truth is, we don’t know the future, and each change in administration in Washington will push its own agenda and inject new elements of change. 

Financial professionals rightly urge you to plan ahead.  Save for retirement in whatever account you have at your disposal, given all the factors.  And if the rules of the game change, then adapt to those.  No one should ask more of you than that.

Until next time,



“Now listen, you who say, ‘Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.’  Why, you do not even know what will happen tomorrow….Instead, you ought to say, ‘If it is the Lord’s will, we will live and do this or that.’” James 4:13-15  NIV*


 *Scripture quotations taken from the Holy Bible, New International Version® NIV®

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