Every year about this time, people start talking about and
considering things like IRA contributions. Most of the time,
tax-sheltered investments make great sense. The federal and
state governments have designed their tax laws to encourage such
savings. However, that said, there are three situations in which
it may be a poor idea to use tax-sheltered investments:
You know you'll need the money early
In this case, it may not be a good idea to lock away money you
may need before retirement because there is usually a 10 percent
early-withdrawal penalty paid on money retrieved from a
retirement account before age 59 1/2. But you will also need
money after you retire, so the "What if I need the money?"
argument is more than a little weak. Yes, you may need the money
before you retire, but you will absolutely need money after you
retire.
You don't need to save any more for retirement
Using retirement planning vehicles, such as IRAs, may be a
reasonable way to accumulate wealth. And the deferred taxes on
your investment income do make your savings grow much more
quickly. Nevertheless, if you've already saved enough money for
retirement, it's possible that you should consider other
investment options as well as estate planning issues. This
special case is beyond the scope of this book, but if it applies
to you, I encourage you to consult a good personal financial
planner--preferably one who charges you an hourly fee, not one
who earns a commission by selling you financial products you may
not need.
Your tax rate will rise in retirement
The calculations get tricky, but if you're only a few years away
from retirement and you believe income tax rates will be going
up (perhaps to deal with the huge federal-budget deficit or
because you'll be paying a new state income tax), it may not
make sense for you to save, say, 15 percent now but pay 45
percent later.
About the author:
Seattle certified public
accountant Stephen L. Nelson CPA has written more than 150
books. His bestselling book is Quicken for Dummies, which sold
more than 1,000,000 copies. His books have sold more than
4,000,000 copies in English and have been translated into more
than a dozen other languages.
