James Pine Has A Blog

Over the last 16 years, since I was of legal age for paid employment, I have been inundated with advice about how to take advantage of tax laws while planning for retirement. Never mind that traditional retirement was 40+ years away. Most people have seen the graphs illustrating the power of compounding e.g. if one contributes W dollars a year starting at age X and it appreciates annually at an average of Y percent, then by year Z one would have a million dollars.

In college, it made sense to contribute to a RothIRA. This was due to my status in a low (if not the lowest) tax bracket. Clearly when I retired I’d be in a higher tax bracket so paying tax on the contributions now, and not the withdrawals later, was the correct thing to do. In hindsight since this ended up being the period between 1996 and 2000 e.g. the Dotcom Bubble, compounded by the recent Great Recession, I’m not sure my account balance is any higher than if I had buried a sack of cash under a rock. It’s also certainly worth less due to inflation. This is of course the benefit of being young, or so I’m told, since I have 27.5+ years left to make something of that account.

Since getting married 5 years ago, my wife has been contributing to a traditional IRA which has the opposite tax rules e.g. contributions are tax deductible and one pays tax on the withdrawals. We decided to do this as a hedge since we were both gainfully employed and it was no longer certain we’d be in a lower tax bracket when we retired. I have also been contributing to my employer’s 401k, which is similar to the traditional IRA when it comes to tax laws.

I’ve run into income limits in the past which have disqualified me from or reduced my eligibility for certain tax deductions e.g. no longer being able to claim all my student loan interest as a tax deduction. Boo hoo. Clearly this is not the worst problem to have as the government is basically saying it thinks we’re doing fine and no longer need any breaks, and oh by the way, please also give us [the government] a higher percentage of your earnings so we can distribute it as we see fit.

My wife and I have lived fairly charmed lives as far as avoiding disasters. A tornado hasn’t gobbled up our home, we’ve never
been hospitalized or at fault for a car accident etc. From this privilaged perspective, some government sponsored programs do have an air of insurance about them e.g. something I pay for but hope to never need. Others like maintenance of the interstate highway system I use all the time. Maybe more transparency is necessary so I can know whether the ROI on the taxes I pay is “good” or not, maybe I don’t care. I’ve structured my life and mindset such that in almost every case, lack of money is not the biggest or only factor stopping me from doing something. Sure if I wanted to go into space right this minute, money might be the main concern, but I figure if I really wanted to go into space I would have become an astronaut.

So while I can certainly complain about taxes and the government, what’s the point? It’s not the limiting factor preventing me from doing what I want to do. As an aside, I was forced to mail our taxes this year since we claimed the new home buyer tax credit which did reveal that the IRS is indeed the Devil.