Pay Taxes – Now or Later
By Steve Gaito
As we approach April 14th, the National Tax filing date, I get quite a few questions on when and how to pay taxes. This is an important question that should be asked every day. When is the best time to pay taxes?
I understand that most people like the refund on their tax returns, but if you think about it if you get a refund it means that you have lent the government your money tax-free. Even given the currently low savings interest you would have benefited from just setting aside a few dollars from each paycheck and you would have more money at the end of the year and not have to wait for the government to send you back your money. I will get off my soapbox on that topic for now.
What I really want to discuss is retirement savings. While working on my son’s taxes one of the last questions asked in the online tax preparation software was do you want to save taxes by contributing to an IRA? This question struck me as odd as my son being a student with very little income and paying no income tax was asked if he wanted to save money to get no benefit now to pay a higher tax later when he takes the money out. For him it was an easy no, but what about others?
When should you save in a tax-deferred account like a 401(k) plan versus saving money in a tax-free plan like a ROTH IRA? Based on what America’s Tax Expert Ed Slott said in a Financial Advisor publication by Karen Demasters that “Retirement plan investors should position their portfolios to pay taxes sooner, rather than later”. The reason for this is that we are in some of the lowest tax brackets in history and with all the stimulus spending, this is likely to not last for long.
For those who are currently saving for retirement, it means that you have to look at options for saving that are not impacted by the future increases in taxes. For those who are closer to retirement or have retired, you have to see how much you can take out each year and stay in these lower brackets. This is too complicated to discuss the how in a short article, but I have software that helps with this analysis and can guide you on a tax-efficient strategy. By utilizing ROTH conversions and other tax-free strategies paying your taxes now can help you avoid the risk associated with increasing rates in the future. I heard at a recent conference that by paying your taxes now you avoid having your retirement accounts up for a vote every two years.
I also have a couple of resources available to you if you would like. They are digital copies of two books.
For people over the age of 50 is the Book “The No-Compromise Retirement Plan” by Martin Ruby, FSA
For people currently saving or thinking about saving for retirement the book “The New Rules of Retirement Saving” also by Martin Ruby, FSA
I have met Martin and heard him speak on several occasions and for an actuary, he is actually very easy to understand and makes great points on why you need to consider changing the way you look at retirement. To get your copy just email me at firstname.lastname@example.org and let me know which book you would like or if you want both and I will send you the link and password. I think once you read this book your eyes will be opened to thinking about when to pay the taxes you own on your retirement plans.
If you have any questions please feel free to give me a call or send me an email. I am happy to talk and help you understand the taxes in your retirement plans.
Steve is the owner of Faith-Based Health Care and Retirement Resource Management. He is a National Speaker on the topic of Social Security optimization, quoted in national publications like Money Magazine, US News and World Reports, and Fox Business. Steve loves to educate and teach on financial topics like taxation of retirement accounts, long term care, healthcare, and efficient savings plans for small businesses. He has provided financial planning for missionaries through the International Mission Board. You can find Steve at 68 South Main St. in Marion, NC by calling 828-559-0299, email email@example.com or visit his website at www.faithbasedhc.com.
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