Chapter Four

Taxation of Government Plans

The assumption of tax savings is often given as a primary reason for participating in a government plan. Do government plans save taxes at all?

Do I save income tax by participating in a government plan?
(IRA, 401k, SEP, TSA, and similar plans.)

This question must be broken down to “now” or “later”. First, do I save income tax now? Does participation in a government plan increase my spendable “money supply” or “cash flow” now?

We will look at Person A and Person B for the answer. They are “clones” except for one thing: one participates in a government plan and one does not.

Person A		Person B
100,000	Gross Income	100,000
10,000	Contribution	0
30,000	Itemized Deductions	30,000
60,000	Taxable Income	70,000
16,800	Tax @ 28%	19,600
43,200	To Spend on Lifestyle	43,200
0	Net Left to Invest Elsewhere .	7,200
100,000	Total	100,000
0	Advantage	0

There is no current benefit (no increase in spendable cash) created by participating in a government plan. 100% of the money that would have been paid in taxes now must be put into the plan instead. It remains an “out of pocket” expense. It was never yours and never will be yours. It is their property, earning interest for them, inside the plan.

Back

Next