Pay taxes now or later? That is the question…
No, this article isn’t about William Shakespeare. And no, I’ve never seen Hamlet. Come to think of it, I hadn’t the slightest clue what a “soliloquy” was until about 4 minutes ago!
A topic I am familiar with is retirement; and to defer or not to defer is a major question you should ask yourself (this is where the soliloquy comes into play) when planning for your retirement.
One of the most common questions I get asked as a financial advisor is whether or not I believe it’s beneficial to defer your income and wait to pay taxes on retirement accounts or not. Meaning, if I have the ability to defer my income (pre-tax) and take a tax deduction today, is that something I should consider? Or, should I pay taxes today (post-tax) to be sure the growth of my accounts are all mine in the future? Well, that ultimately depends on you and your specific situation.
Tax-diversification is extremely important and could be the difference between retiring as comfortably as you’d like, or feeling like you’re stepping on eggshells every time you take funds from a respective retirement account.
I’ll list some of the factors that should affect your decision here:
– What is your current income?
– What is your current tax-bracket?
– Do you believe your income in retirement will be lower, as much, or higher in retirement?
– Do you believe that your tax-bracket will be higher or lower in retirement?
– Do you believe that tax-brackets relative to earned income will increase or decrease in the future?
Common accounts that defer income:
Defer (Pre-Tax, i.e., Pay Taxes Later)
– Traditional IRA’s, SIMPLE IRA’s, and SEP IRA’s
Common accounts that do not defer income:
Do Not Defer (Post-Tax, i.e., Pay Taxes Now)
– Roth IRA’s
– Roth 401(k)’s
– Permanent Life Insurance
– Municipal Bonds
In my opinion, tax-diversification is extremely important and could be the difference between retiring as comfortably as you’d like, or feeling like you’re stepping on eggshells every time you take funds from a respective retirement account.
In addition to speaking to a financial advisor about affairs pertaining to your retirement, please seek the advice of a tax professional before making these decisions to be sure your specific scenario can be accurately assessed. And remember, the question: to defer or not to defer?
Written by Jason Frederico, CreativeNurse Team member in Las vegas
2016-30362 Exp. 10/17