28 • MARTIN H. RUBY
Dave has $760,000 in a 401(k). When I first met him, he was laser-focused on income: he and wife needed $100,000 a year in income for the retirement lifestyle they desired. He wanted to know the best way to manage and protect his $760,000 so that, along with Social Security and his wife’s pension, they could meet their income goal. But Dave forgot about his hidden debt. He believed his IRA was worth $760,000. It wasn’t. Dave’s tax liability is around 25 percent. So, when he with- draws $50,000 from his IRA, he only gets to keep $37,500. The other $12,500? That’s the taxes he owes. That’s his debt payment to the IRS. Put another way, Dave is indebted to the IRS (and its state and local partners) for around 25 percent of Dave’s retirement funds. While he was saving, Dave got a tax deduction on his 401(k) con- tribution every year. It was like a loan he didn’t have to repay an- ytime soon. But now, as Dave gets ready to retire, he’ll start to repay that loan. Why don’t most of us think about our hidden debt? Because it doesn’t impact us now. When you buy a house on mortgage, you live in the house every day and make your mortgage payments each month. But with your IRA, you’re not using the money until years in the future, and the debt isn’t immediately clear. It’s about to become clear. Like Dave, when you begin accessing funds from your IRA or 401(k), you begin paying back your debt to the IRS. And it gets worse. Because in truth, you’re paying back that debt with interest. After all, you deferred taxes only on your IRA contributions. Now, you’ll be paying taxes on your IRA contribu- tions AND all the growth that’s occurred in your account. The IRS is taking its cut of your principle and your earnings.
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