Are You Sure You Want to Cut that Check for Your Annual Traditional IRA Contribution this Year?

April 15th is right around the corner. Your advisor might be suggesting you make your annual IRA tax contribution to save on tax taxes.

Does making a contribution to your IRA really save on taxes?




It depends. Retirement accounts do not avoid taxes they simply postpone taxes. You will pay taxes when you start withdrawing from your account.



The facts.

• You will not know the exact amount of the taxes owed until you start withdrawing the money.


• The tax calculation is also postponed until withdrawal time.


• Your tax bracket play, at time of withdrawal, determines the amount of tax to be paid.


• The tax bracket at the time of contribution is not used at the time of withdrawal and tax calculation.

It is impossible to determine the tax savings during the contribution phase because of your unknown future tax bracket. The calculation can only be determined once the withdrawals are taken. The uncertainty of your actual tax bracket at withdrawal and the uncertainty of the future formula for calculating taxes are unknown factors. This should be an alarming concern.

You must understand the rules. Your qualified money is under government control. The government decides the rules and the way the game is played. The government also decides when you will take the withdrawals, the amount of withdrawals, and the tax bracket at withdrawal, regardless of your current financial situation. The rules may change at any time with a stroke of a pen. New rules may not be to your benefit.

Qualified Plans are tax postponed savings vehicles. You will not know if you have made wise decisions because of the unknown tax brackets at the time of withdrawal. Great investment decisions might be adversely impacted by significantly higher tax bracket. It is important to know all the rules so you can make educated decisions.