People love their 401k’s and their IRA’s – until they call upon them to begin distributing their retirement income.

Here’s a fact for you:

$125,000 of tax-free retirement income roughly equates to what is left over after $265,000 is taxed.

That’s not a small difference!

Prior to the 1970’s, defined benefit pension plans that were funded by employers were the usual vehicles for retirement. In an effort to shift the funding burden and investment risk onto the backs of employees, the government worked closely with Wall Street to create stock and mutual fund-driven retirement vehicles. Defined benefit plans were quickly replaced with 401k’s and other defined contribution plans. Back then, the IRS knew what the baby boomer demographics were and also realized that these baby boomers were going to retire someday. Well, that day is now here.

The IRS framed this new arrangement of defined contribution plans by giving us a tax deduction for our annual contributions while employed – but that means they will tax our income at retirement.

If you were offered the option of paying taxes on “the seed or on the harvest”, which would you choose?

Virtually everyone answers “the seed”. But that’s not how most of our retirement plans operate with almost all of them taxing our retirement (our harvest) as fully taxable income!

We know what our tax rates are today, but what will they be down the road? If a poll were commissioned, I would anticipate that over 95% of those polled would admit that they feel that our tax rates will be rising. President Biden has repeatedly stated that he wants to:

• Double the capital gains tax.
• Increase the top tax bracket to almost 40% (just for starters…)
• Decrease the exclusion on estates, and
• Increase the tax rates on those estates.

The government doesn’t care if your income is derived from active employment or from retirement plans…to the IRS, all income is fully taxable regardless of the source of that income. If income taxes rise, taxes on retirement income will also rise. Since retirement income is most often calculated to be less than one’s active employment income, any additional loss of income due to taxation will be particularly painful during one’s retirement.

Aside from the fact that one can certainly lose money in the market, any gains realized are subject either to ordinary taxation or to capital gains taxation. If dividends are earned, then they will also be subject to ordinary income taxation (which is the highest rate of taxation.) The stock market giveth and it taketh. The government does, as well.