An Individual Retirement Account was intended to incentivize Americans to save for the future. A consequence of IRA legislation is that traditional pensions, those that paid a predictable monthly benefit, have been dying a slow death. The theory behind an IRA contribution was that a worker would get an immediate tax deduction for contributions, and when the worker takes their funds out of their IRA, they would be retired and in a much lower tax bracket. Thus, the retiree could benefit from the spread between the high tax bracket they were in when money goes in, and the much lower bracket they will be in when the same money comes out. This is tax bracket arbitrage.
But things changed. Reagan dropped the highest tax bracket from 70% to 50%, and tax rates kept falling. As tax brackets continued to decline, the tax benefit of an IRA contribution continued to decrease as well.
Budget wise, lower tax brackets meant the US government was borrowing from the future. As we look into the future now, the pressure is building to raise taxes and tax brackets to pay off these swelling debts. Thus, it is very likely that investors could be deducting IRA contributions now at a low tax rate, and then in the future, they might be forced to pay the government back at a higher tax rate. This is the inverse of an IRA’s original intent and the opposite of tax bracket arbitrage.
Thus the question is: are millions of Americans contributing to IRA and 401k’s getting a lower bracket tax deduction now than they will be in retirement????
Our guess is that your brokers and many advisors are not having this discussion with their clients. Call or email us and we will gladly discuss your situation and the best solution for you. We won’t charge you a penny, nor will we sell you anything. We are a fee-based advisor, we have a fiduciary responsibility (not like brokers), and we want to help you grow and protect your assets.
