Missed Opportunity

How powerful is the opportunity of deferring taxes from your current income?  Are you taking advantage of tax-deferral?  If you qualify to use an the tax benefits of an Individual Retirement Account (IRA) but aren’t doing so, why don’t you?

I’ve illustrated the possibilities of employing the uses of a plain old Traditional IRA (Individual Retirement Account)  using a hypothetical example created from Intuit’s© Payroll website.  Please read on to learn about the tax-deferred opportunities presented by investing a Traditional IRA.  You might be amazed to learn how simple contributions to this type of account can help you build your retirement assets.

Scenario #1

Monthly gross pay–$5,000; Single filer; Claim 1 exemption;  No tax-deferred contributions.


Salary                      $5,000.00

Federal tax             $783.65

FICA                    $310.00

Medicare                $72.50

CA State Tax           $259.05

CA SDI                  $50.00

Take home pay                   $3,524.80


Scenario #2

Monthly gross pay–$5,000; Single filer; Claim 1 exemption;  Max IRA contribution of $458/mo.


Salary                          $5,000.00

Federal tax            $669.15

FICA                   $281.60

Medicare               $65.86

CA State tax           $212.20

CA SDI                 $45.42

Take home pay                  $3,267.77


Here’s the real math ‘kicker,’ and premise by which this article started:  By putting away $5,500 a year (or $458 a month) into a tax-deferred savings account for his sacred and well deserved retirement, it really only cost the ‘scenario #2’ tax payer $3,084 a year (or $257 a month) in current year take home pay.

Of course, this reduction in taxes paid in the current year will result in an increased tax liability once the funds are withdrawn from the IRA.  That’s because tax-deferred assets are taxable as ordinary income upon withdrawal.  You’ll also want to keep in mind that withdrawals prior to age 59 ½ may result in an additional 10% tax penalty.

If you were shocked at the increased amount money ‘Uncle Sam’ took out of your paycheck this month, you may want to consider making a larger contribution to your retirement plan.  OK, yes, you’ve heard that from your advisor before, and maybe you acted on it.  If you haven’t heeded that advice, I recommend you do!

Why not take advantage of this “tax-deferral opportunity” (who said the IRS wasn’t on your side!) and start making a bigger impact on your retirement savings.  Only “if,” and that’s a really big ‘only,’ you have too much stockpiled for your retirement will you ever hear me say otherwise.  Until then, please help me to help you understand how your retirement plan is 100% contingent upon what you do between now and that golden day.

And if you think there’s a good chance you’ll win the lottery (and therefore do not have to sock money away for your retirement), I hope you have a sufficient amount of life insurance in place before lightning strikes you first!

(a)     Example used as an illustration only and should not  be construed as tax advice.  Actual results will vary based on your specific situation.  Always seek tax advice from a tax professional prior to making tax-based decisions.

(b)     Consider your personal investment horizon and income tax brackets, both current and anticipated when making an investment decision.  Changes in tax rates and tax treatment of investment earning may further impact investment results.

(c)     Disclosure: Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Investment strategies, including asset allocation and diversification, do not assure a profit and cannot protect against losses in a declining market. The views expressed within are not representative of National Planning Corporation (NPC), and should not be construed as investment advice. Investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Please consult your Financial Professional for more information.