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> I have generally found it more financially rewarding to focus my time on increasing income rather than on finagling my finances to save money. Same reason I d

> I have generally found it more financially rewarding to focus my time on increasing income rather than on finagling my finances to save money. Same reason I don’t own a credit card just to get the cash back or other incentives. Diverting some of your income into a tax-deferred investment account will not significantly affect your ability to focus on increasing income. They're not mutually exclusive. My approach largely resembles yours, but there's no effective difference between increasing income and reducing how much of it is taken from you in the form of taxes. If your priority is to increase your income, deciding to throw some of it into a tax-deferred investment account can be seen as a very efficient use of your time spent increasing your income.

alexmingoia 7y ago
Tax deferring doesn’t necessarily equate to reduced taxes. IRAs just mean paying taxes later, at an unknown rate. All income from IRAs are taxed, principle and gains. A traditional IRA has gains taxed as income, which is higher then long-term capital gains on ETFs. Assuming tax rates don’t change, a traditional IRA will cost more taxes if the withdrawal and contribution taxable income is over roughly 40k, correct me if I’m wrong. That’s assuming income tax isn’t higher in the future, which is quite a gamble as historically income tax has been going up, and historically there’s just been more and more taxes. Don’t forget that deductions for contributions don’t matter, because you will pay income tax on that principle when you withdraw. If tax rates increase, the tax cost of deferring could be even worse. It really depends on if you’re going to be earning income when you withdraw and how much is going to be withdrawn. It’s complicated and practically impossible to estimate total final tax obligations at retirement. IRAs are not a cut and dry “just put money in an IRA” decision. Another problem with IRAs is the lockup. If you withdraw before retirement there’s a hefty 10% penalty unless it’s for a mortgage or health insurance.
- farisjarrah 7y ago
  You can also do a Roth IRA which allows you to pay tax on it now.
  - alexmingoia 7y ago
    Sure, and IIRC like a traditional IRA gains are taxed as income. So there’s not necessarily any tax benefit versus a traditional savings account invested in ETFs, depending on withdrawal and contribution incomes.
- newnewpdro 7y ago
  Aren't you ignoring the advantage of being able to invest the money you would have paid in taxes for the entire time you've left it all in the tax-deferred account? I don't get why you're assuming you'll have to withdraw the money prematurely and incur the penalty. That's a rather pessimistic attitude, and it's not like you'd be putting all of your investment funds down this path.
  - alexmingoia 7y ago
    You have to withdraw at some point (after age 59-1/2 unless the law changes), and you’ll pay income taxes on principle and gains then. Taxes on principle will be paid either way. If you give to your children, they will pay taxes on the principle + inheritance tax. The idea with tax deferral was that when you retire, your fixed withdrawal income will have a lower income tax rate than when you contributed, but as capital gains and income tax are now, that isn’t necessarily true depending on your contribution and withdrawal income. Roth IRA was then created as a response to the well founded concern that income taxes will rise negating any tax advantage to deferral, but Roth wasn’t able to pass the legislation without severe compromises like contribution limits, and gains taxes as income on withdrawal.
    - newnewpdro 7y ago
      You pay tax on it eventually, like you said with the lower tax rate when your income will be presumably lower. But in the mean time, which can be a very long time, you're free to invest those deferred tax dollars. That can add up to a significant amount, over a large number of years. It's not something to trivially dismiss.
      - deleted 7y ago
        [deleted]

alexmingoia 7y ago

Tax deferring doesn’t necessarily equate to reduced taxes. IRAs just mean paying taxes later, at an unknown rate. All income from IRAs are taxed, principle and gains. A traditional IRA has gains taxed as income, which is higher then long-term capital gains on ETFs. Assuming tax rates don’t change, a traditional IRA will cost more taxes if the withdrawal and contribution taxable income is over roughly 40k, correct me if I’m wrong. That’s assuming income tax isn’t higher in the future, which is quite a gamble as historically income tax has been going up, and historically there’s just been more and more taxes. Don’t forget that deductions for contributions don’t matter, because you will pay income tax on that principle when you withdraw. If tax rates increase, the tax cost of deferring could be even worse. It really depends on if you’re going to be earning income when you withdraw and how much is going to be withdrawn. It’s complicated and practically impossible to estimate total final tax obligations at retirement. IRAs are not a cut and dry “just put money in an IRA” decision. Another problem with IRAs is the lockup. If you withdraw before retirement there’s a hefty 10% penalty unless it’s for a mortgage or health insurance.

farisjarrah 7y ago
You can also do a Roth IRA which allows you to pay tax on it now.
- alexmingoia 7y ago
  Sure, and IIRC like a traditional IRA gains are taxed as income. So there’s not necessarily any tax benefit versus a traditional savings account invested in ETFs, depending on withdrawal and contribution incomes.
newnewpdro 7y ago
Aren't you ignoring the advantage of being able to invest the money you would have paid in taxes for the entire time you've left it all in the tax-deferred account? I don't get why you're assuming you'll have to withdraw the money prematurely and incur the penalty. That's a rather pessimistic attitude, and it's not like you'd be putting all of your investment funds down this path.
- alexmingoia 7y ago
  You have to withdraw at some point (after age 59-1/2 unless the law changes), and you’ll pay income taxes on principle and gains then. Taxes on principle will be paid either way. If you give to your children, they will pay taxes on the principle + inheritance tax. The idea with tax deferral was that when you retire, your fixed withdrawal income will have a lower income tax rate than when you contributed, but as capital gains and income tax are now, that isn’t necessarily true depending on your contribution and withdrawal income. Roth IRA was then created as a response to the well founded concern that income taxes will rise negating any tax advantage to deferral, but Roth wasn’t able to pass the legislation without severe compromises like contribution limits, and gains taxes as income on withdrawal.
  - newnewpdro 7y ago
    You pay tax on it eventually, like you said with the lower tax rate when your income will be presumably lower. But in the mean time, which can be a very long time, you're free to invest those deferred tax dollars. That can add up to a significant amount, over a large number of years. It's not something to trivially dismiss.
    - deleted 7y ago
      [deleted]