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Taxes and Your Future

by Craig Moser on June 1, 2018

Have you thought about taxes and your future? We all know the government has bills to pay. To do that, they need tax revenue. Generating that tax revenue is debated with two primary choices.  Either ask a smaller percentage of the population to pay a higher tax rate or have a larger percentage of the population pay a lower tax rate.  This question created quite a controversy resulting in tax reform.

Politics aside, the government dropped tax rates to increase consumer/corporate spending while encouraging companies to bring capital back to America.  In other words, when your taxes are lower, you have more money left in your wallet each month.  You use that money to go out to eat, buy a few more clothes, take a trip, or even buy a new car.  This generates more revenue for the government.  Likewise, companies build more factories and hire more people which also generates more revenue for the government.

The Impact of Tax Reform

Many hope tax reform will lead to the U.S. reducing our deficit. However, if our deficit continues to climb, taxes are likely to increase.  The questions are how much do they increase, and are you retired when they do? Is your money in a taxable 401k or IRA account? Is your money in a Roth IRA or cash value life insurance that isn’t subject to taxes?  How much will it cost you to get your money?

For a moment, assume taxes have significantly increased by the time you retire.  If your retirement savings are in a taxable account, such as a 401k or Traditional IRA, you now pay more to access the money.  You’ve enjoyed growth on a tax-free basis for years, but Uncle Same is ready for his cut.  The tax increase means more of your money goes toward taxes and less toward your retirement.

Conversely, if your savings aren’t subject to taxes, the value of your savings aren’t affected.  You paid taxes as you went along, so Uncle Sam doesn’t get anything when you access your money.  The full balance is yours to use toward retirement rather than taxes.

The Lesson

We hear different politicians argue about whether tax reform is good or bad. Regardless of what anyone thinks, the current tax schedule is what we have right now. You can either grumble and complain about it, or you can use it to your best advantage. Think carefully about whether it makes sense to save on taxes now while rates are low, only to pay substantially more in taxes in the future? Use tax reform to get the most out of what you can do today.

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