ST. CROIX INSIGHTS
What Does Saving Money Really Mean to You?
BY BRETT ANDERSON/ST.CROIX ADVISORS, LLC
I thought I was saving money for retirement. It turns out there is another side of the coin.
My Aunt Hank
My Aunt Hank, one of my all-time favorites, used to wear electrical tape around her shoes because she couldn’t afford to purchase new shoes. When I took her grocery shopping she would ask for a 6-pack of pop because she couldn’t afford a twelve pack of Coco-Cola (or so she said – I knew better!). Or stealing the sugar from the restaurant and bringing a few packets home for coffee in the morning. Now that’s a real life example of saving money at its core. How many of you would do that? Today, our shoes get a little dirty and we’re on amazon.com buying new ones.
Retirement & Taxes
I bet we all have a host of ways we try to save money, day-in and day-out, and my guess is you’re pretty successful at it. At the same time, I bet you’ve overlooked a major expense that we’re all going to face when we retire: taxes. You’ve saved all these years into your IRA, 401k, 403b, SEP or Simple IRA plan but haven’t considered helping prevent your retirement accounts from being consumed by taxes. Uncle Sam is the uncle who shows up and never leaves. If you’re not careful, he’ll eat you out of house and home.
With the exception of a Roth IRA, contributions are contributed on a pre-tax basis and upon distribution, these types of accounts (IRA, 401k, 403b, SEP, Simple IRA) are taxed at the ordinary income rate. The tradeoff is tax-free growth since taxes are paid upon distribution at retirement.
A Bigger Trade Off
But, here’s the bigger trade off. What happens to your retirement accounts when you die? Heirs potentially encounter not only income taxes on the account, but also potentially estate taxes. You need to add it all up – all of your retirement accounts, your home, your investments, and even your business to determine your federal estate tax rate. I also failed to mention any State taxes which you may need to include. It doesn’t take long before over 50% of your retirement accounts could be eroded by taxes. Chances are you haven’t worked all these years just to pay taxes, have you? I’m all for paying my fair share, and my fair share alone. I would rather see my family and favorite charities benefit from the fruits of my labor and planning.
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Ask yourself- can my portfolio support my lifestyle in my retirement?