48 • MARTIN H. RUBY
• Pluses : All accumulation within the policy is tax-free. If your $20,000 contribution grows to $100,000, you’ll never pay taxes on the $80,000 gain. Many professionals do not expect to be in a lower tax bracket when they retire, so it makes sense for them to pay taxes upfront. • Minuses : You cannot deduct contributions today to lower your taxable income during your contribution years. It can be hard to make a decision about which way you want to save from reading the brief descriptions above. After all, these descriptions don’t take into account the variables that can happen with regard to taxes . . . your tax risk. What Happens If . . . Deciding whether to save tax-free or tax-deferred comes down to one question that may seem pretty hard to answer: Will you pay less OVERALL taxes by paying your taxes today or in the future? While no one can predict the future, I’m about to show you why there’s a good chance you can answer the question above. First, let’s consider what happens to your savings if taxes go up or down. Tax-Deferred If you’re saving money in a 401(k) or traditional IRA, you will pay taxes when you withdraw the funds in retirement. For example, if you are sixty-five years old and withdrawing $100,000 annually from your retirement account, and you are paying around 30 percent in state and federal income tax, you’ll get to keep $70,000 and the government takes $30,000. If your taxes are higher in the future than they are today, you could end up paying more in taxes than you saved when you de- posited the funds. If your taxes are lower when you withdraw the funds in retire- ment, then you will be paying less in taxes when you access your
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