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Retirement Tax Trap? What You Need to Know About Tax Deferral

Would you like to pay less in taxes this year? is a trick question. A pertinent answer is another question: will it cause me to pay more in taxes later? If not, duly paying less in taxes is a no-brainer. But when paying less in taxes now is merely tax-deferral, the decision can be brain-racking. It involves comparing the tax reduction received now and the taxes expected to be paid later. We’d rather not pay more later than we save now. So, before kicking the tax can down the road, it’s wise to look ahead.

This matters a great deal because opportunities to defer taxes abound. For instance, retirement saving commonly involves tax-deferred accounts like 401(k)s, IRAs, and 403(b)s. Although they’re individual accounts, we might as well think of them as joint accounts because Uncle Sam expects his share when we take withdrawals. How much we get to keep depends on how good a long-term tax plan we craft.

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