One’s retirement income may come from many different sources, including: CDs and Savings, Non-Qualified Annuities, Investments and Mutual Funds or Qualified Plans (401(k), IRA, 403(b), etc.)
Qualified plans offer a tax deduction, and tax deferred growth, with the income being taxable when received. Non-qualified plans offer no tax deduction and maybe tax deferred growth, with tax favored or tax free income when received.
I would contend that with a National Debt now approaching $20 Trillion and climbing; and uncontrolled government spending (I point you to the last Budget Deal) that the logical and educated guess would be increased income tax rates looming in the future. Add to this the maladies of Social Security and Medicare and you may see increased rates and/or expanded levels of income to which these rates are applied.
So, if you are getting a tax deduction now at a comparatively low income tax rate, with rates likely to go higher in the future… would you want your potential retirement income to be taxed now or later at the higher rates?
Our income tax rates in today’s world are relatively low. When I entered the financial services industry the top marginal income tax bracket was 70%. Back in the 1960’s, the top marginal tax bracket was over 90%. It wasn’t until Ronald Reagan was elected that these rates came down… and they have snuck back up since then.
Let’s also consider the estate tax. When I began in the business, the estate tax rate started at 55%, there was not an unlimited marital deduction and the unified credit was equal to a mere $250,000 of taxable estate assets. Far different than the estate tax and unified credit of today.
Here is a quiz for you today:
Although the income and estate tax rates have changed over the years and are fairly favorable to the American public, what is the constant in this equation? The answer is simple: The Administration and Congress. Sure faces have changed, but they still control the rules of the game. There is nothing that says these honorable ladies and gentlemen couldn’t make an abrupt U-Turn and return to the days of more onerous taxation.
We need to add one more factor into our scenario. What if interest rates trend upward? Do you think this might add pressure on the tax rates to cover the interest on the National debt? Sure it would and the government would need still more of an infusion of new money.
Spending and out of control debt. This may mean higher taxes. Maybe protecting your retirement income would dictate that some should be in plans that will provide tax favored or non-taxable income.