For the Successful at Building Wealth, Isn’t a 401k (or any IRA) a Bad Idea?

A similar question to the one we asked yesterday is, “What if you are successful in building wealth, will the IRA tax deferral have been a wise choice?”

We have a lot of clients who are in the 25 or 28% Marginal Tax Bracket.  Your marginal bracket is the bracket that your last earned dollar is taxed at.  No one is taxed on their first dollar earned.  The current tax brackets are then 10%, 15%, 25%, 28%, 33%, and 35%.  The government is promising to raise these, but those are the current levels.  If your family has a taxable income of $104,425 or less than you are at a 28% bracket or less.  If you and your spouse make $150,000 and have $45,000 of tax deductions such as charitable deductions and mortgage interest, etc., you fall into this 28% bracket.

The question is, are you going to be successful at growing financial wealth?  Part of the theory of why deferring taxes is such a great idea is because you’re going to be poor when you’re old.  For most people this is true!  If they got the money into their hands that they would otherwise have put into a 401k or IRA, then they would blow it and therefore putting the money into these accounts would be wise for them.  They will be poor in their old age and so they might have a lower tax rate in “retirement” years than in their working years.  For them, this is a good plan.

But what about you?  If you’re reading this, there’s a good chance that you plan to be more prudent with your money.  If you continue this diligence, then it is absolutely possible for you to build substantial wealth.  If you are successful, and tax rates don’t change, (we spoke yesterday about that scenario) then you will end up pulling money out of your plan at a higher rate than you were able to save by putting money into the plan.

Again, we’ll ask: What sense does it make to defer taxes today at one rate, to put money somewhere where you do not have complete stewardship (control) over it, only to pull it out later at a higher rate of taxation?

This is _Part 18_ in the series titled The Trunk. To continue with this series, click on Pt 19.  To use this as a growth tool, please read Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12, Pt 13, Pt 14, Pt 15, Pt 16 and Pt 17.

Photo credit: jhhwild

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