Tax deferral is a con, and I’m going to prove it to you.
Actually, I’m going to let you prove it to yourself, with this 5-second experiment.
The conventional wisdom says, “Maximize your contributions to tax-deferred plans, like 401(k)s, IRAs and 403(b)s. Your money compounds without being reduced by taxes, and you’ll end up with more money during retirement.”
But is it really true?
The Society of Actuaries says that if the tax rates are the same, “It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”
But most people look at their savings and think it’s all theirs. You may have forgotten you’ll owe the IRS the taxes you deferred all those years – on every penny you’ve put in and every penny of growth.
If the tax rates miraculously manage to be lower during your retirement, you might come out ahead by deferring your taxes. But where do you think tax rates are headed long term? You must consider what tax rates might be during a retirement that could last 30+ years. [Read more…] “Tax Deferral is a Scam and Here’s Proof”