As a Retirement Income Planner, I work with pre-retirees and retirees alike. All too often the story is the same. The conversation quickly turns to the 401(k), 403(b), TSP or IRA that makes up the lion's share of their retirement income producing assets. Invariably, these accumulation vehicles have no built-in mechanism to provide for income, and so the conversation begins. What everyone is concerned about initially is preservation of their Principal, Potential for Growth, and Income. As the conversation evolves, "Income" invariably becomes the #1 issue. As well as it should. That is what you worked so many years building these government-sponsored tax-deferred retirement plans for, isn't it?

Qualified Retirement Plans

Hello, I'm from the Government and I'm here to help you.

Have you ever heard this "pitch" before? "When you are ready to retire, you will be earning less and therefore be in lower tax bracket. When you take the money out (Harvest), you won’t pay as much in taxes on it." Wow, that makes sense! Right?

Put your hard-earned dollars that you would be paying taxes on anyway into this Qualified Retirement Plan 401(k),IRA, TSP, 403(b) and you will "qualify" for a tax deduction. That is why it is called a "Qualified" plan, because it "qualified for a tax deduction." You will be building reserves within this plan for your retirement, and you won't pay any taxes on these dollars until you are ready to use them. (And this is where you need to start really paying attention.) Overall, it is a good idea to save and build for your retirement years. No argument here.

Would you rather pay taxes on your Seed or on your Harvest? This is an interesting question and the more you think about it, this gets real interesting. When you place funds into a "qualified" retirement plan, you start it and feed it with what is known as "Seed Money." From those seeds will hopefully grow a very large and prosperous crop for you to "Harvest" and store in your silos to live on for the rest of your life. Right? In qualified retirement plans, just like in farming, there are lots of "hidden costs" from the basic seeds to actually harvesting and getting the harvest to the silo. Fact is, the least expensive part of the entire venture is the "seed". All the costs go up from there. Have you ever noticed as time goes by it seems that most costs tend to go up?

Do you think taxes will go down in the future or up?

If the cost of seed is the least expensive part of filling the silo, and Uncle Sam is giving us a tax deduction on that element of the process, does that make you even slightly suspicious? Remember, you won't pay any taxes however, until you have a crop that is ready and you begin the Harvest. This might be some years down the line.

Tax-deferred DOES NOT equal tax-free.

Now it is time to Harvest and fill the silo. Some will fill one silo, while others will fill many and others sadly, none. Here is where we look at all of our expenses to determine the ROI and look at all the costs. While seed was the least of our expenses, we did get a tax deduction for it over all those years. So what was our largest cost?


"I thought you said that you were from the Government and you were here to help me?” Are you telling me that now that I am retired and ready to use all that I labored for all those years, that I have to pay taxes on the money you allowed me to put in there ? Are you telling me that I have to pay taxes on not only the principal, but also on the growth and even the matching funds my employer added? Yeah, that's right!

And then you find out that Social Security will kick in. Hallelujah, some extra money coming in. Wait a minute, I have to pay taxes on that too? Yeah, that's right…

But I’m retired. I paid taxes my whole working life. I paid FICA taxes for that Social Security. My accountant told me I could save on taxes by contributing to that IRA or 401(k),403(b) or TSP. And then it occurs to you…


©2015 Winston P. Stevenson