“Tax Deferred” the Loaded Term

With total savings within qualified plans in the United States being something around $18 Trillion, you probably have know about or have heard about various types out there.

I wanted to talk about what “Tax Deferred” means within a qualified plan. I like to change the phrase to “Tax Postponed”. When you put money into a qualified plan you are delaying having to pay taxes, BUT you are also delaying the tax calculation.

When people start saving in a qualified plan what they expect, and most Americans believe, they will retire in a lower tax bracket then they are in during their working years. The average tax rate during the life of taxation in the US is 58.61% and today we are in surprisingly low tax rates compared to that. Based on that and the country’s debt do you think tax rates are going to start going up, stay the same, or go down?

On top of changing tax rates you also have to remember deductions. The kids may not be out of the house, but they aren’t a deduction anymore, your house has been paid off, your not contributing to any retirement plans…

For some people in the highest tax brackets qualified plans could be a plausible option, but for many Americans there are many alternatives that should be considered. Of course if your 401(k) has an employer match you want to take advantage of free money, but consider all your options before maxing out all your qualified plan savings.

What is your opinion on retirement savings and qualified plans?