fbpx
U

Are Tax-Deferred Savings a Ticking Time Bomb?

June 25, 2008

taxes

"If Thomas Jefferson thought taxation without representation was bad, he should see how it is with representation." – Anonymous

Deferring taxes has always been a bedrock principle of retirement planning. The logic is simple: why would anyone pay the government now when tax-deferred accounts allow you to delay your obligation for 15, 25, and maybe even 40 years? If a reduced household income after retirement put you in a lower tax bracket, the savings could be considerable.

But, what would happen if your tax rate after retirement was actually higher then what you would pay today? Could we see a scenario where deferring 25 cents in taxes today ends up costing you 33 cents (or more) when you withdraw your money in retirement?

It’s a frightening thought if you worry, as I do, about the sustainability of current tax rates. Given the poor financial health of the federal government and our unfunded liabilities associated with health care and social security, many experts believe that tax rates will surely rise over the coming years.

The Wall Street Journal’s Jonathan Clements examined this concern in a fascinating article, "Protecting Your Retirement No Matter Who’s President". Under most reasonable tax rate scenarios, he concluded that tax-deferred accounts still generally make sense if you have a long enough time frame.  He ultimately recommended a sensible sounding 3-pronged strategy that should hedge your exposure to most tax code reform efforts. There are a lot of caveats in his analysis so I suggest you read the article carefully and run your own analysis.

In today’s show, I also share my thoughts about a favorite fund of mine, Dodge & Cox Stock, that’s recently reopened its doors to individual investors. I generally don’t recommend actively managed large cap mutual funds, but this fund’s approach to investing and its long-term track record might make them worth a look for your portfolio. Since your situation will be unique, please reach your own conclusion by examining their prospectus and track record.

***

Thanks for listening! If you enjoyed the show, please visit the Apple iTunes website and leave us some positive feedback. They often feature shows like this one that have consistently good feedback. If we can do a better job, drop me a personal email. See you next week 😉

Most Recent Episodes

Financial Advisors Share What They WISH They Knew About Money Earlier!

Have you ever felt like if you just knew this one thing about money earlier your finances would be in a better spot? In this episode, we’ll share the five biggest things we wish we knew about money earlier!   In this episode, you'll learn: What we wish we knew earlier...

Dave Ramsey vs. The Money Guy: Which Strategy is The Best?

Dave Ramsey has an incredible legacy of helping folks get out of debt and take control of their financial lives. We agree on a lot of things, but there are a few points of contrast. In this episode, we’ll discuss differences between The Money Guy Show and Dave Ramsey...

Top 4 Financial Mistakes We Saw This Year! (2022)

We saw some wild financial mistakes this year during the bear market. From making extreme changes to portfolio allocation, chasing the hot dot, and using too much leverage, we’ll talk about some of the biggest financial mistakes we saw in 2022 in this episode.   In...

How Millionaires Build Wealth! (With Dave Ramsey)

Join us for a very special episode as we welcome personal finance radio host and influencer Dave Ramsey to The Money Guy Show! There’s so much misinformation out there about building wealth. We had the pleasure of having a great conversation about how millionaires...

Do These 4 Things with Your Finances BEFORE 2023!

There are unique financial opportunities available at the end of the year - especially this year with the market down. In this episode, we’ll talk about what you need to do with your money BEFORE 2023! In this episode, you'll learn: What you need to do with your money...

How to Win When the Financial World is Burning!

Lately it’s felt like the financial world is in chaos, with rising interest rates, a falling stock market, and high inflation. Let’s talk about how to focus on what you can control and how to minimize the time spent worrying about what you can’t control. In this...

Financial Advisors React to RIDICULOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

Loss Harvesting: Why Wealthy People Love It (And You Should Too!)

Tax-loss harvesting: what is it and should you be doing it? In this episode, we’ll cover everything you need to know about tax-loss harvesting, including whether it makes sense for you, how much it could save you in taxes, and how to eliminate the downside of loss...

The Market is Crashing! (Where Should You Put Your Money?)

The stock market has not had a great year so far. You might be asking yourself, “Since the market is crashing, where should I put my money now?” In this episode, we’ll discuss how to invest when the market is dropping and how to make the most of your money. In this...

Will Rising Interest Rates Tank the Economy?!

The Federal Reserve is raising interest rates to combat inflation, and many are concerned about how it will affect the economy. In this episode, we’ll discuss what rising interest rates means for your wallet and how to make the best of it. In this episode, you'll...