My Comments: The ideas behind this article have filtered through my mind for decades. Everyone and their brother talks about the value of socking away money in an IRA or other tax advantaged retirement plan. And there is an advantage to this, only it has nothing to do with taxes.

The advantage is the perceived tax advantage and the discipline it imposes on you to set aside money for the future and a disincentive to reach in and use that money before you reach age 60. That alone has value, but it has nothing to to with taxes.

Because at the end of the day, when you take your money out and use it, you get to pay taxes then. Meanwhile, you have taken all the risk, spent all the emotional energy making sure its working right and that there will in fact be an account there for you and your loved ones to draw on. And now Uncle Sam gets a larger piece of the pie since hopefully the pie has grown over the years.

By Rob Russell | U.S.News & World Report LP – Thu, Jul 19, 2012 9:49 AM ED

What if everything you were told about saving in your company retirement plan was bogus? What if the benefit of tax-deferred growth in your mutual fund based retirement plan was really a well-funded Wall Street marketing gimmick?

For decades now, you and I have been told to sock away our hard-earned money into 401(k)s, IRAs, 403(b)s, TSPs, etc. to reap the benefits of tax deferral and to just trust the system. Advisors, tax preparers, and CPAs jumped onto this Wall Street bandwagon of letting your money grow tax-deferred until you retire. The crux of their seemingly logical-sounding argument was that you’d be in a lower tax bracket in retirement, thus kicking the “tax can” down the road.

Were they right? Would paying the tax later in retirement be better? Or, was it just a big marketing gimmick for you to buy into the mutual funds peddled by Wall Street?

Would you agree the answer depends on future tax rates? Future tax rates are almost as unpredictable as future market prices. I think, however, an argument can be made that future tax rates will eventually be higher than today’s historically low tax rates simply because they have to be (thanks to the national debt, deficits, Social Mecurity and Medicare imbalances, etc.)

Consider today’s retiree or soon-to-be retiree. A middle-class married couple making $65,000 per year is currently in the 15 percent bracket. If this couple is currently contributing to their 401(k), in essence they are deferring the payment of taxes at a 15 percent rate. In only five short months (under current law) they will be in a 28 percent bracket, almost double their current rate. If they plan to retire in 2013 and intend to live off of Social Security, a pension, or investment income they will actually be in a higher tax bracket. Given this example, did kicking the “tax can” down the road actually work for them or will they actually be subjected to higher taxes during their retirement?

This big retirement lie could be harmful to retirees and soon-to-be retirees because they will live on less since they will be paying the government more, but it could actually work well for their younger counterparts contributing to their retirement plan. Here’s how:

I’m Young & Far From Retirement, What Can I Do?

–Maximize your Roth IRA/Roth 401(k) contributions this year and then switch to tax-deferred accounts once tax rates increase (2013 under current legislation).
–Retirement savers age 30-45, take some of the money your contributing to your 401(k) and parlay it into a “tax-free retirement” by buying an inexpensive “Second to Die” life insurance policy on your parents (with a return of premium benefit). This strategy (which admittedly may draw some controversy) may provide you with a significant tax-free lump sum at or near retirement.
–The two most critical factors to making money in the markets are: Risk management and true diversification. Get comfortable with these terms. Risk management means cut your losses short and let your profits run. True diversification means investing in truly different un-correlated asset classes. If all you own is mutual funds you’ll do well when the market goes up, but you’ll get killed when the market goes down.

I’m Retiring, What Can I Do?

–Convert to a tax-free Roth while tax rates are ultra-low. If you’re wrong you get a “do-over” because you can always convert back by next October (using a process called a Roth recharacterization).
–Book your gains this year while the capital gains tax is low.
–Look for appropriate investment tax shelters in 2013 like NREs – Natural Resource Exploration investments (though, as always, consider investment risks and fees).
–Look for higher-yielding investments in order to generate more income offsetting the higher tax bill.
–Higher income earners: Consider bunching your deductions this year (combine your deductions for 2012 and 2013 into this year’s tax bill because your deductions may get phased out in 2013).