Imagine that you’re a farmer, and your tax collector gives you two options: (a) get taxed by the seed or (b) get taxed by the crop.
Which option do you choose?
Most people will choose (b), by the crop—and they’re wrong. In fact, you should choose to get taxed on the seed. So many people are conditioned to defer their taxes until the future—even though the tax rate in the future is a complete unknown. But if you pay tax on the seed, your harvest will be yours to keep. Consider taking the same approach when you’re deciding how your retirement fund will be taxed.
Most of us have been taught to invest in a tax-deferred retirement account. Tax-deferred means you invest your money without being taxed, but then when you withdraw this money when you retire the amount you take out will be taxed as income. But do you think taxes will be higher or lower when it comes time to take it out—10, 20, 30 years from now? (You should count on the tax rate being higher.) Plus, as we all get older, many of our deductions go away. For example, when you pay off your house (or downgrade to a smaller house), you lose your mortgage deduction. When your kids graduate and move out, you lose these deductions, too.
Instead of using a tax-deferred retirement account, if you pay a little tax now, you’ll likely be able to keep more of what’s compounded later on. Look at it this way: If you want to double a dollar every year, the first year it doubles from $1 to $2. The following year it doubles to $4. After eight years, that amount has gone up to $256.
After 20 years, what will be your balance after that single-dollar investment?
You will have amassed $1,048,000.
If you’re not paying taxes on your investments along the way, you are choosing to give the IRS the spoils later on. So why not pay a little tax now—and keep all the compounded growth for yourself? You could do that with a Roth IRA or a 401K Roth IRA. Also, if you own a business, you can now have a 401K Roth IRA inside your company. You can put aside a maximum of $17,500 a year, and if you’re at least 50 years old, the amount goes up to $23,000.
If you are going to be truly financially free, you have to not only spend less than you earn and invest the difference, but you have to be able to protect what you have, and capture the growth for yourself.
This article is for educational and informational purposes only. Neither Robbins Research International, Inc., Tony Robbins, nor their affiliates (collectively “RRI”) are accountants, tax consultants, licensed professionals or certified financial planners, and you should not rely on any statements made in this article to determine the correct strategies for you. RRI does not guarantee any results or returns based on the strategies outlined in this article, and you agree to hold harmless RRI, its employees, officers, agents or affiliates from any of your activities or strategies which may result from information obtained from this article. You should choose a competent tax consultant or financial advisor to determine the strategies that are right for you and your particular situation.