Why I Stay Away From Tax Deferred!

Dear Readers,

Very few vehicles are Tax Free. It basically means you do not have to pay taxes on the gains of your investment. Chances are though that you will have to pay taxes on the money at the beginning. Let's do an example for those that like numbers.

You have $10,000 from a work bonus. As a result, the government is going to tax you and take away 30% of that money. What you really have is $7,000 after the government taxes you.

You take the $7,000 and over time it goes up in value by 50%. The value is now $10,500. When you tax it out, there is no taxes.

When it comes to investment vehicles, Tax Deferred is a lot more common. A common vehicle that is Tax Deferred is a 401K or an IRA. It means that you are paying taxes, BUT you are not going to do it now. You are going to wait until a later date.

So, using our example of $10,000, you do not have to pay taxes on it now. If the market goes up 50%, then the $10,000 is now worth $15,000. SOUNDS GREAT!

However, now is the time you have to pay your taxes. Let's assume that the taxes are still at 30%. You'll have to pay $4,500 in taxes ($15,000 x 30%). That leaves you with $10,500.

I just came up with the exact same number for both tax free and tax deferred. So, I guess it does not matter.

I am going to ask you a very simple question. Social Security makes up around 25% of the federal budget and it is struggling. A lot of people project that social security will not have enough money in 2035. That is only 12 years from today. Medicare is supposed to be even worse.

The question is simple, how is the government going to pay for these programs? If you are like me, I believe taxes are going WAY UP! In 1978, the taxes were at 70%!

So, what would a tax deferred investment look like if taxes went up? That is hard to tell, but here is a quick glimpse.

$15,000 x 30% Taxes = $10,500

$15,000 x 40% Taxes = $9,000

$15,000 x 50% Taxes = $7,500

$15,000 x 60% Taxes = $6,000

$15,000 x 70% Taxes = $4,500

Remember, in the example you started off with a $10,000 bonus. In this market, deferring your taxes can be crippling to your Deferred retirement if taxes go up.