First, tax-deferred is tax-compounded. If you put money into a tax-deferred IRA or 401k, and grow the money, you’ve grown your tax burden. Holding taxes constant, tax-deferred is tax-compounded. All things being equal, you might prefer to save a little money in a tax-free account.
Second, as we age, we lose tax deductions. Think about it. Many income tax deductions help you raise kids (credits, dependents, exemptions, and more). But as we age, the kids move out. Even if they move back in, we can’t claim them as dependents forever (really). Another huge tax deduction is the home mortgage interest deduction. As we age, we pay off the mortgage (hopefully, usually, at least we used to) and that’s another major tax deduction that we lose as we age. Go Tax Free discusses ways to choose when and how much to pay in taxes.
Third, taxes are likely to increase and not decrease over our lifetimes. For reasons many of us know, and many politicians avoid, the Federal deficit is growing, year after year. To pay for the promises we’ve made, we may need to raise taxes. Indeed, the odds point that way.
