The 401k & IRA Tax Myth: Why ‘Saving on Taxes’ Could Cost You More Later

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You’ve been told forever that 401(k)s and IRAs “save you taxes.” They don’t. They delay your tax bill and if rates rise, you could easily pay more later than you would today. 

In this episode, I pull the curtain back on one of the most expensive myths in personal finance and show you why deferring taxes can sabotage your freedom.

I start by laying out how traditional retirement plans really work: you contribute pre-tax dollars, they grow tax-deferred, and you withdraw at ordinary income rates the highest rates on the tax chart. 

Then I ask the only question that matters: do you want to pay tax on the seed or the harvest? If you’re planning to live an abundant life with strong cash flow, paying later on a larger harvest can become a costly mistake.

I also break down why many employees lose major deductions by retirement (mortgage interest and dependent credits), while healthcare and lifestyle spending often increase. Add inflation, and you must withdraw more nominal dollars to buy the same life pushing more of your withdrawals into higher brackets. We look at the history of top marginal tax rates and the current reality of federal debt and deficits, making the case that betting on lower future tax rates is wishful thinking.

If you’re a business owner, I get even more direct: stuffing cash into a 401(k), SEP IRA, 403(b), or TSP can be a raw deal. You’re often in your lowest effective tax rate today thanks to business deductions then you voluntarily trade that for higher ordinary income taxation later, after you’ve sold your business, lost deductions, and possibly entered a tighter bracket structure. And remember: with ERISA plans like the 401(k), you’re not the true owner the government writes the rules and can change them (RMD ages, penalties, access) whenever it wants.

What about Roth IRAs? They’re better than traditional accounts, but still government-controlled with tiny contribution limits, income phase-outs, and the ever-present risk of rule changes. The “backdoor Roth” can also be closed at any time. If you’re serious about becoming work-optional, you need control, liquidity, and tax strategy you can count on.

I explain why I prefer using properly structured whole life insurance as a cash-value foundation (what many call “infinite banking”): contractual guarantees at the time you start, tax-advantaged access along the way, and the ability to redeploy capital into cash-flowing real assets like real estate—where depreciation and other strategies can offset income. I also share how I personally treat old plan balances (e.g., legacy DB/IRA funds): I don’t count on them, and when possible, I look to self-direct into assets I understand.

Bottom line: traditional retirement plans don’t “save” taxes; they postpone them, often to a worse time. If you want real freedom faster, prioritize vehicles and strategies that give you control now, protect you from inflation and rising taxes, and produce passive income that lets you work because you want to not because you have to.

If you want help mapping this out, head to MoneyRipples.com, try the Work Optional Calculator, and keep your eyes out for my new book, Work Optional Blueprint.