IRAs, 401(k) Plans and other retirement savings accounts are a good deal, especially if you receive a contribution from your employer to match your own contributions. That is an automatic return on your investment. If you contribute 4% of your salary to a 401(k) Plan, and your employer matches that 4%, you have an automatic 100% rate of return on your investment, and then, if you invest the funds correctly, the funds will grow even more than that. On top of the growth of your funds, the IRS lets you deduct the amount you deduct from your income. From a tax perspective, it is like you were never paid that portion of your salary, and therefore do not pay income taxes on that amount, and the IRS remains blind to that money as long as you leave it in the account.
However, the lovingkindness that the IRS bestows on your retirement account eventually comes to an end. When the time comes to distribute funds from your accounts, the IRS Piper must be paid. This can mean that you will likely pay about 25% of that distribution in Federal and State taxes, depending on your tax bracket and the State you live in. So, if you have a very commendable $1,000,000 in your retirement accounts, those funds will only offer you the buying power of $750,000 after you have paid your taxes. Continue saving, but keep in mind as you march toward your goals, that your retirement accounts are not worth as much as they appear to be.
