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Retirement Tip: Pay More Taxes or Retire?

What would you rather do: Retire or pay more taxes?

I ask because that's the choice you make every payday. You can (1) contribute to your retirement plan, get a tax deduction, defer taxes on your investments, and eventually retire; or (2) spend all your income, pay more taxes (because you didn't get the benefits Uncle Sam bestows on savers), and never retire.

Then there's the employer match -- if that is, in fact, a benefit offered by your boss. He/she/it is offering to pay you to save. Don't question why an employer would fund something that will eventually allow you to quit -- just take the money.

Not convinced? Then ask yourself this: What would you rather have, $750 or $1,500?

That's the choice you'd make for every $1,000 you earn, assuming you're in the 25% tax bracket and your employer contributes $0.50 to your retirement plan for every buck you sock away.

If you choose to spend that $1,000 you earned, you first have to pay income taxes, leaving just $750. However, if you choose to contribute that $1,000 to your retirement plan, then the whole $1,000 is invested, since contributions are sheltered from income taxes. Plus, your boss will kick in another $500. So I ask again: what would you rather have, $750 or $1,500?

Of course, you do eventually get to spend that $1,500 -- years after tax-deferred growth, while you're kicking back in retirement. (To be fair, Uncle Sam will then want his cut, but you'll still come out ahead.) So it's really not a question of spending versus saving, but rather a question of spending some now versus spending more later, after you've declared your financial independence.

Not sure you're saving enough? Give our Rule Your Retirement service a 30-day free trial, which features a high-powered financial planning tool that will tell you whether your retirement plan is on track, as well as suggest an asset allocation.

You can also visit our IRA center to learn more about your savings options.

This article was originally published on May 15, 2006. It has been updated.

Robert Brokamp heads up the Motley Fool Rule Your Retirement newsletter service. He is also married to Fool contributor Mrs. Riches, which makes him Mr. Riches.


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