Let’s talk about how money works! As a little girl growing up in The Bronx, I was introduced to my brother-in-law’s father who was an immigrant from Sicily. He wasn’t formally educated, but he had old world wisdom. He told me at a very young age in broken English
“It is not about the money you make! It is about what you keep.” That was true then and it is true now.
Many of us generate income in various ways and we fill our bucket with money. We think our bucket is safe! However, what if we trip and spill the bucket? What if our bucket has holes in it? How do we keep our money growing, protect the gains and avoid the losses? Good questions for sure, but what are the answers?
The good thing is that there are answers but there isn’t one answer that fits all. There are many strategies out there that can satisfy the unique needs for individuals. Which one is right for you? The answer is: IT DEPENDS.
Imagine this bucket that you have has holes in it and these wealth transfers are putting a drain on your economy. You may not even be aware that they exist! Through education we can share ideas that may help you keep more of what you earn.
For instance, today, let’s cover taxes. Many individuals are in tax-deferred plans, (such as 401(K), 403(B) and SEPs). What they don’t understand is that these plans are truly tax postponement. While there certainly are benefits to having an employer match, we also want you to be aware of the tax ramifications later down the road.
Let’s dive deeper.
When a farmer buys seeds and plants them, he expects a harvest. Just like when a farmer buys seeds, do you think he would rather pay taxes on the seed or the harvest? The seed of course. If we draw a comparison with the farmer, we could pay our taxes now and let our retirement fund grow tax-free. What we don’t realize is that by not paying the taxes now when we are paid and defer it, we are now going to pay taxes on the growth as well. Unbeknownst to a lot of folks, we also are in one of the lower tax brackets in history! It is just a question, but with the debt clock ticking away, do you think taxes are going to go up or down? And if you believe taxes are going to go up, does tax deferral really make sense?
There is also a great misunderstanding that individuals who retire are going to be in a lower tax bracket, but that might not necessarily be true. Most people will have their mortgages paid and most likely, their children will be out of the house. (unless your 35-year old is playing video games in your basement).
The other piece to consider on taxes is that Medicare Premiums could be affected by how much income you make in retirement. Also, up to 85% of your Social Security may be taxable at normal income tax rates if you make over a certain threshold.
In looking at your bucket of savings, do you potentially have holes in it whereby you could lose your hard-earned money? Stay tuned for our next article on how money works! Until Next Time!
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