PERHAPS A BETTER ARGUMENT FOR ROTH IRAs

In the financial planning world, we hear a lot of different pitches for different products and strategies. I often have heard it said that tax rates have gone down substantially with the highest marginal tax rate often cited. Confession. While, I currently may have some clients in the ‘one percent’, most of my clients are not in the highest tax bracket. They tend to be people who are doing above average to the top five percent. The thought crossed my mind, wouldn’t it be far more useful to be able to draw up what tax history has been for those demographics? Hence, what you are about to see.

Marginal Tax Rates

Marginal tax rates have by and large gone down over time since 1971 for all household incomes, with the median household income looking to potentially be subject to a 50% marginal income tax rate in 1971 and a 15% marginal income tax rate in 2011.

Whether this downward trend will continue is uncertain. An interesting study would be to determine what a stereotypical two child household would have paid after standard deductions at the various times in history. Based on the data I gathered relating to inflation adjusted household income from the U.S. Census Bureau and marginal tax rate data from Tax Foundation with historical data spot checked from IRS 1040 forms.

If the 70s or 80s come back into fashion as it relates to taxes, those who had decided to invest inside of a Roth IRA today, will most likely be thanking themselves in the future.

Delayed Gratification

It is important to note that as one works towards goals, one should keep in mind the importance of delayed gratification. In the process of saving, one may feel tempted to get something that one wants, whether it is a particular item such as a car or a large screen television, or an experience such as a long awaited vacation, etc.

We all have items and experience that we would like to have and when one has enough money to acquire said items or experiences there is a temptation to take it. Some things personally that I would like to experience include a trip to Antarctica, an Alaskan cruise and para-sailing  Some items that I would like to have include once again having a harp (at present my eyes are on the Silhouette Electric, the Style 100 Concert Grand, or the Style 2000 Concert Grand by Lyon & Healy) and a home of my own design. There are items and experiences that I can afford on this list and some that would absolutely make no sense for me to purchase at this point.

Oftentimes when we decide to purchase something, we do not tend to realize the opportunity costs associated with something. Many will say X will only cost Y and we either have the money or we do not. One of the problems that we face is that we do not often realize the opportunity costs associated with our purchase or what I will refer to as the ongoing/collateral costs.

I have had several people tell me that when they buy season tickets to a sporting event the problem is that it is not just the season tickets that they have paid for, but every time that they decide to go to the game, the food and drinks that they will have before, during, or afterward not to mention the jackets or jerseys that many a fan will end up purchasing as well. Are these expenses necessary? No. But in their defense, if I were to purchase a harp, I would most likely also want a case, an amp, several sound effect pedals, lessons, etc.  Or if I were to have my dream home that I built, there is a good chance that I would succumb to the temptation of purchasing all of the various things that I would want in it to make it “perfect”. It is amazing when we make a purchase how it sometimes can open up a Pandora’s Box of expenses which we did not initially anticipate.

All of this money meanwhile could have potentially been placed in an area that would have grown and helped us better be able to afford our desires. The importance is to be able to refrain… especially with items that will be ongoing expenses. After all it is not the initial $200 that may be such a big deal; it is the $50-200 each month that can truly add up.

The moral of the story is this: if you can delay a purchase that would not be adding productive value to your life, please consider doing so. Chances are your checking account and wallet will thank you for your discretion.

As always, please send your questions and comments to info@objectiveplanningllc.com