A Look at Taxes
If you have followed me here or on social for any length of time, you’ve likely encountered the idea in the last 3 weeks or so that, “it’s not what you make, but what you get to keep that matters.” For this installment of the “Rules of the Game” series, I’m going to tackle the greatest threat to what people get to keep as both citizens and residents of the United States. Hint, there’s not a close second.
If you guessed that we’re taking a look at taxes, then you get the blue ribbon today, and just in time for tax day!
However, since a federal income tax came online a little over a century ago in the US (1913), the rules have been changing so often, that if you were to only pay attention to meeting the rules of the moment, you’d never stand a chance to get anywhere. So instead, we have to look at the trends rather than the rules to know where we are going and how best to get there.
I need to mention that in my capacity as a licensed financial professional, I don’t render tax or legal advice. My work does keep my eyes on possibly the biggest, most predictable financial crisis our country has ever seen and the trends that show that most Americans aren’t doing anything to protect themselves from it when doing so is fairly simple.
Is it simple enough for me to give an exhaustive lesson in a newspaper article? Afraid not, but it is simple enough for you to start leveraging it for yourself, and your legacy, in the next 30 days with the help of a knowledgeable guide!
To get us started, here’s a helpful overview on how taxes on savings can help you connect to why trends, not rules, are important.
TAXES ON SAVINGS
When saving money, there are three ways to do it from a tax perspective. First, there’s taxable savings, which includes savings at the bank, stocks, mutual funds etc. These savings are liquid for the most part. The price for that liquidity is that the income you save is taxed or non-deductible. Interest growth is taxed yearly when you earn it, and withdrawals often create a taxable event that adds to your tax liability. Thrice taxed, they live up to the name, “Taxable savings.”
Next, there’s tax-deferred savings. Here’s your traditional retirement savings for the most part i.e. a 401k, 457, 403b an IRA etc. Think of tax-deferred as tax-postponed. Here, you get to deduct the savings from your taxable earning, and you get tax deferral on market growth. When you withdraw it in the future, assuming it’s when you’re 59.5 years old or older and you’re doing so without penalty, you’re getting taxed as ordinary income for everything you withdraw.
At first glance, tax deferral seems like an amazing deal! In many cases, it is--to a point. So, why not just take the win? What’s the catch, and why are so few asking the question? The question you have to ask yourself is where you believe taxes are going in the future. Are they going up, staying the same, or going down?
Currently, we're in the lowest tax environment since 1917. Yet, we just witnessed our national debt go up by $5 trillion in the last year while unfunded liabilities (that's promises our government has made to us without a dime yet saved to cover them) is now topping $160 trillion and rising by $1 million every 5 seconds, and no one seems to want to address it in the public square.
Do you want to risk having to pay taxes as income on your savings that has been compounding for decades if future tax rates are 2 or 3 times higher, or would you feel safer if your financial plan worked to remove that risk as retirement approaches?
Next week, I'm going to conclude this series in a way that I believe will give you some hope and some next-level insight on reducing your tax exposure over time! If you can't wait, reach out to me on social @chuoparah to secure an invite to our free How Money Works workshop for you or a friend so we can all get better together!
Kelechukwu “Chu” Oparah is a Licensed Financial Professional Serving your Dayton Community. For more content, Chu is on Instagram @chuoparah.
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