Financial Freedom Friday – “Saving” on Taxes


Hey everyone, welcome back to Financial Freedom
Friday. It’s Nate again here to discuss tips and strategies
to help you find financial freedom. Today we’re gonna talk about something as
we come up to year end. I hear this a lot from people as we’re getting
closer to year end- they say, “Nate, should I put some money into a retirement program,
deposit money into my IRA, to save money on taxes?” And it’s kind of like nails on a chalkboard
almost to me to hear this phrase of saving money on taxes by contributing to an IRA. The reason for that is IRAS, 401(k)s, things
like that, they’re not called a tax savings program, they’re called a tax-deferred program. It’s kind of the nickel hide the dime for
a lot of people. They say, okay if I put money into the program
then I won’t have to pay taxes on it so I’ll save money on taxes. Let’s say you put in $5,000 into an IRA or
something like that. You may save $1,500 but what you’ve really
done is you’ve, it’s actually like deferring your income is the way it’s kind of set up. A lot of assets are deferred tax, but the
retirement programs are more like deferred income. I can put $5,000 of my income into an IRA
or 401(k) or something like that, and I don’t pay taxes on it now. It’s gonna grow but in the future I’m gonna
need to pull it out and pay taxes. And if you run the numbers it really works
well if you end up retiring in a lower tax bracket, so that $5,000 that you contributed
that you will pay tax on when you pull it out is at a lower tax bracket. So that’s great. But a lot of things are tax-deferred as well. Like if you just go buy stocks, or you just
go buy real estate, just buy $5,000 of it. As that real estate appreciates or as the
stocks appreciate, you actually don’t have to pay taxes on the appreciation of something
until you sell it down the road. So the main benefit of these is this deferred
income idea where you’re deferring your income into the future. And the main goal being paying less taxes. Well, we could debate whether or not that’s
a good idea, or whether or not you’ll really be in a lower tax bracket. I’m not here to do that. But when someone says save money on taxes,
there are plenty of things that actually save money on taxes, but retirement programs are
not what you would call saving money. In other words I put in $5,000 that I don’t
get to use today to go do other things. It has to sit in this program for a period
of time. If you’re in your 40s, it’s 15, 20, even 25
years where that has to be there where we can’t use it outside the program. So it’s locking money up to defer a tax to
hopefully be in a lower tax bracket. The benefit is not just the fact that you
save $1500 because you’re gonna have to pay the tax at some point. We just don’t know what rate it’s going to
be. So it’s not really saving taxes, the question
really should be should I defer some taxes to the future? Another point is, that I get into when discussing
this is, in my opinion, retirement programs have done a pretty terrible job of meeting
people’s financial freedom goals. But yet people are still putting money into
them. So I talk to people and they’re being very
successful in their business, they’re investing in some real estate, they’re doing well there,
and maybe doing some private lending, we see the gamut. And then I also hear, and they’re doing very
well, and then I also hear they’re stuffing money into a retirement program because of
“the tax savings.” And what I’m trying to tell them is, guys,
remember it’s not a tax savings program, it’s a tax-deferred program. You’re gonna have to pay taxes on it sometime,
it may be better or not, but I can almost guarantee you that, typically, if you would’ve
taken that same money, paid the tax on it, and then invested it in the real estate or
different things, you might actually be able to do better. Most of the people that I talk to don’t even
really like mutual funds, they don’t even really appreciate the stock market. They’d rather put money in other things, but
typically when you put money into a retirement program it is in mutual funds. It doesn’t have to be, I’m not saying it has
to be, I know people have some self-directed stuff that might be okay, but typically that’s
where a lot of their money is. In mutual funds. And they don’t even like that. But they’re just doing it because that’s what
everyone is doing and they hear about this “tax savings.” For me personally, I’d rather pay the tax
now and be able to do whatever I want with the money, whenever I want to, invest however
I want to, and actually do things that maybe will actually save taxes, not just defer tax. Many times people talk about wanting to retire
in 5, 10 years and they’re maybe 40, and yet they’re stuffing, hoarding money into these
retirement programs that they’re not really going to be able to touch for a much longer
time period with penalties and they won’t have control over them. So they’ve got most of their money going into
things they actually like, and then they’re still putting $15,000 a year into a 401(k)
or something like that. Just question whether or not if you’re just
doing it for the tax savings, question yourself is it really worth it? Because the tax savings doesn’t really save
taxes, the tax benefit is a deferral of tax. But that’s just one small thing in a huge
picture of your financial position. So whenever I hear that at the end of the
year it’s like nails on a chalkboard. I wouldn’t just put money into an IRA because
you don’t want to pay taxes on that income this year and you’d rather pay taxes on it
20 years from now. I’m not saying that retirement programs are
all bad necessarily, what I am saying is that actually completing what you want to complete
with your money? Is it doing what you want it to do? So just take that into account, don’t just
do it for the “tax benefits,” do it because you say this is my best option, this is what
I really want to do, I like doing this. And then go with it. Always see it holistically. But to end this whole thing, never forget,
that if you don’t build your freedom, nobody’s gonna do it for you. So let’s get to work and we’ll see you next
week.

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