An Immeasurable Debt

March 3, 2020

My Dear Reader,

Every dollar that is inside of your 401k is tax deferred. Tax deferral simply means tax postponement. Every single dollar that you earned through your income is subject to the income tax, there’s no way around it. Yet the financial industry will tell you that your 401k is a tax savings. Would it bother you, if you found out that you didn’t save a dime?
Let’s suppose a doctor put $1 million into a 401(k) in the 1980s, when the plans first came out, he would have deferred the tax due on the $1 million for that year. But if he retired in 2018, he would have effectively deferred a $280,000 tax bill, to pay the federal government a tax bill of $370,000. That’s if his money never grew by another dime. Now, by the time most Americans retire, they will have paid off their home, and their children will have left the nest. What this means is that they will have very few tax deductions left to take advantage of, which raises the effective tax rate. Therefore, the tax rate will be felt more in that person’s wallet.
Does it bother you that every dollar inside your 401k is actually still indebted to the IRS? How does this work for those of us who wish to be debt-free?

Even worse is the fact that taxes create more taxes. Did you know that your social security is subject to tax? Here’s how it works. If you make more than $44,000 filing jointly, the government has decided that you make too much. From the government itself, when they introduced the tax in 1983, “If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income that is between $32,000 and $44,000. If your combined income is more than $44,000, up to 85 percent of your social security benefits [are] subject to income tax.”8 There are many problems with this. First of all, it implies that the government has the right to retroactively tax the benefits that it gives. Furthermore, it implies that the law doesn’t have to recognize inflation in their taxation decrees. The Motley Fool, a popular investment site, describes social security as unfair, in this way.
“The problem with the Social Security tax provisions, however, is that they weren’t indexed for inflation. Indeed, that omission was deliberate, and after just ten years, inflationary pressures had almost doubled the number of Social Security recipients with taxable benefits from 10 percent to 18 percent. If the initial figures had been subject to ordinary inflation indexing, then they would have more than doubled by now. Specifically, based on the recent inflation data compared to 1983, the 25,000 threshold would be close to $60,000, while the$34,000 figure would be more than $81,000.”9 A couple who are retirees living on less than $40,000 are broke. Yet the government seems content to take back money that they forced everyone to pay in. Even if you live modestly, you cannot escape this unjust tax. This is why I believe that it doesn’t matter what your money earns, but rather where it is.

To your creation and potential,

Kevin Prendiville