RRA Educational Resources/Blog/Tax-Deferred Accounts: A Few Reasons Your Retirement Needs More

Tax-Deferred Accounts: A Few Reasons Your Retirement Needs More

For many years, tax-deferred retirement accounts such as traditional 401(k)s and traditional IRAs have been a popular choice for retirement savings. These accounts allow individuals to contribute pre-tax dollars, which grow tax-free until withdrawals are made in retirement. However, as the tax landscape changes and retirees face new challenges, there are compelling reasons why retirees should consider moving away from tax-deferred retirement accounts. Here are a few reasons to consider why:

Uncertainty of Future Tax Rates
One of the main drawbacks of tax-deferred retirement accounts is the uncertainty of future tax rates. Retirees may be forced to withdraw money from these accounts when tax rates are higher, leading to a higher tax burden than they anticipated. With the national debt at historic levels, many experts predict that future tax rates will be higher than they are today. By using alternative retirement savings strategies, such as Roth IRAs or taxable investment accounts, retirees can better control their tax liability in retirement.

Required Minimum Distributions (RMDs)
Retirees with tax-deferred retirement accounts are required to take annual withdrawals, known as required minimum distributions (RMDs) once they reach age 72. These RMDs can be a burden for retirees who do not need the money for living expenses or who do not want to increase their tax liability. By using alternative retirement savings strategies, such as Roth IRAs or taxable investment accounts, retirees can avoid RMDs altogether.

Loss of Control
Retirees with tax-deferred retirement accounts have limited control over their investments, as these accounts are typically managed by the plan sponsor or financial institution. This can be frustrating for retirees who want more control over their investments or who want to invest in non-traditional assets. By using alternative retirement savings strategies, such as self-directed IRAs or taxable investment accounts, retirees can gain greater control over their investments.

No Tax Benefits for Heirs
​Retirees who pass on tax-deferred retirement accounts to their heirs may be passing on a tax liability as well. Heirs who inherit tax-deferred retirement accounts must pay income tax on the distributions they receive, potentially reducing the value of the inheritance. By using alternative retirement savings strategies, such as Roth IRAs or taxable investment accounts, retirees can provide their heirs with tax-free assets that may be more valuable in the long run.

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