Smart Retirement Savings

Is IRA Contribution Always A Good Deal?

Jeff Schnepper at MSN Money argues that for people already in high tax brackets, contributing to retirement savings account may not be an automatic winner. Instead, by paying tax now and invest in after-tax accounts, one can count on a lesser tax hit on portfolio's capital appreciation.

This is certainly contrary to all common knowledge of retirement savings, but it holds some truth too. Especially, if you are young and have a long investment time horizon, you'd better save in Roth IRA/401(k) or even after-tax accounts for long-term tax advantage.

Let's say you're in the top tax bracket now, and you expect to be so at retirement. Any distribution from your IRA or other qualified retirement plan is going to be ordinary income that's taxed at today's maximum 35% rates. Current tax rates are now the lowest I can remember. With exploding deficits creating a continuous need for new revenue, I can only see tax rates moving higher.

So, you may pay a lot more than 35% on your retirement distributions.

Those who invest for the long haul do so for capital appreciation, and they scoff at income investors with 1% or so returns who are struggling to meet their expenses. And it may pay for you to invest outside any tax-qualified plans. You may give up a current tax deduction. But your long-term gain won't be taxed at more than 15%.

Say you've got a $100,000 gain on your investment when you retire. That minimum $20,000 in tax savings would pay for a whole lot of tax deferral and a current $3,000 deduction. It's at least another point of view.