Remember that taxes do good things and you do have choices

First, breathe.  Lighten up.  We’ve all been there in one year or another.  Find gratitude.  The taxes you pay do good things – libraries, schools, roads, people to fix the roads, street lights, police, courts, and the list goes on.  These things may not be perfect, but for the most part, they’re functional.

Second, remember that you have choices.  Here’s something else a bunch of you did this tax season:  You funded your qualified retirement plans.  When you looked at the difference in your tax bill based on whether you funded that plan or not, it felt like a no-brainer to fund it.  You thought, “Look at all the money I saved in taxes!”  You probably thought with pride, “I put money away for retirement just like I’m supposed to and look at how much I put away!”

If you had these thoughts, I want you to contemplate these thoughts:  (1) If you believe taxes are going to remain the same or go down for you in retirement, it makes sense to fund qualified plans.  But if you believe taxes are going up, you’ve just “kicked the can down the road,” when taxes in retirement will likely be much higher.  Did you really save money?  Frankly, taxes are on sale right now.  (2) You may have been better off funding a tax-free retirement with after-tax dollars, rather than a qualified plan, so that when you go to retire, you’ll have fewer taxes to pay, less fear about tax deadlines, and a simplified tax return.  Starts to make retirement look even better, doesn’t it?  Remember that you have choices about how you earn, invest, and spend your money.

There’s an Alternative Worth Considering

Roth IRAs have two big downsides:  (1) you can’t access the money without penalty until you’re 59 and a half or have special circumstances; (2) the income limits for contributing to a Roth remain intact ($120K for single filers, $177K for married couples in 2010); and (3) the amount you’re able to contribute is low ($5K; $6K with catch-up).  We get this one-time shot at converting to a Roth, but for many of us, we’ll never be able to contribute another dime to that account.

But what if you could?  What if you could put 10 or 20 percent of your income (an amount that might actually get you through retirement) into an account that would grow tax-free, would allow you access the cash tax-free for any reason at all at pretty much any time, would never require you to take a required minimum distribution, and would transfer to your heirs income tax-free?   Would you do it?  You’d sure like to know about it, right?  It exists.  It’s out there.  It’s likely available to you.

Here’s another issue:  If your IRA accounts are a small portion of your overall net worth, it actually might make a lot of sense to leave it alone and let it grow.  If it’s one of the few places that you’ll withdraw taxable income in retirement, you may be financially better off leaving it in its Traditional IRA form.  Take the tax savings and invest it.

Gain Perspective

Think about it in this over-generalized, exaggerated way: Let’s say you have a garbage bag full of 500 $1 bills. If a gallon of milk costs $5, that’s going to cost five of your 500 $1 bills. Not a big deal right? You buy the gallon of milk and you hardly even notice. Now, think about it from the store’s perspective. If the store owners know you have 500 $1 bills, they also know you could easily spend 20 of them without blinking an eye. So they simply charge $20 for the gallon of milk. Ouch! Too much money chasing the same goods.

 If you’re concerned about inflation as it relates to retirement, you know you’ll need much more money in retirement than you do today (that gallon of milk is going to cost more). If inflation is wildly out of control, then your money needs to earn wildly out-of-control returns (and then some) so that you will have enough money for milk in the future. That’s a scary prospect given the stock market roller coaster of late.

 But what if you could reduce or eliminate a big expense in retirement so that you had more money available to spend on milk?  That would mean you would need less money overall and those wildly out-of-control returns would be unnecessary.   For many, that solution and that kind of planning and strategy exist.  The inflation monster might be your friend.  It might be what shows you the door to a tax-free retirement.