Back in 2017, I had just started working in the finance industry when then-President Donald Trump bushwhacked his way through a largely hostile Congress to push his landmark achievement — the Tax Cuts and Jobs Act.
Trump bragged that his law ushered in the biggest tax cuts America had ever seen. That wasn’t quite true — in recent history, Reagan’s monumental 1981 rollbacks were bigger, as were, ironically, Obama’s extensions of Bush-era tax reductions. Still, the change in tax policy was substantial, and almost every American saved money as a result.
But the program came with a conspicuous asterisk. Not a single Democrat voted in support, forcing Republicans to settle for a diluted version of their reform. The tax cuts were necessarily temporary, set to expire at the end of 2025.
That sent tax planners and financial advisers into ferment. They’d been gifted a rare moment of prescience — taxes would likely remain at their lowest floor in decades until 2026, at which point they would almost surely spike.
It changed the investment game. For decades, most American workers have housed their retirement savings between two primary investment vehicles: 401(k)s and Individual Retirement Accounts, or IRAs. In many ways, they do the same thing. The big difference is that 401(k)s are offered by employers and IRAs, as the name suggests, are opened by individuals themselves.
But here’s the key similarity — both are tax-deferred investment accounts. You don’t pay taxes on any of the money you invest until what time you decide to withdraw it.
“There are several different types of accounts that you can invest in that have different taxation related to them,” A local financial adviser — whose name I've withheld to save him any legal troubles — told me. “... With the most popular, like 401(k)s, you pay the taxes later when you’re pulling money out of them.”
It’s one of Uncle Sam’s neatest tricks. For about 40 years, or however long you stay in the workforce, the arrangement feels like a steal. Set aside money, don’t pay taxes, benefit from compounding interest. What could be better? But eventually, ol’ Sam gets his, and it’s often more than fresh retirees expect.
“I have a lot of clients come to me when they’re already near retirement,” the adviser said, “and they wish they’d come earlier because they didn’t realize what they could have saved.”
Investors don’t have to defer taxation. Some investment accounts, notably Roth IRAs, house after-tax money. Choosing between a traditional tax-deferred account or something such as a Roth, then, has always been a gamble. Do you think taxes will be lower when you retire? Then deferment makes good sense.
But if taxes are going up, pay off now as much as you can.
“Generally speaking, in the short term,” the adviser said, “with all the government spending that has taken place and is likely to continue taking place, I’m really worried about an uptick in taxation. It’s already on the table.”
My source was careful to emphasize that he is not authorized to give tax advice (three other CFPs wouldn’t talk to me at all). None of what he said should be construed as such. But I’ve heard dozens of finance experts issue explicit warnings behind closed doors. The writing is on the wall: taxes will go up.
We’re seeing it play out on the Hill. President Biden, still in his first 100 days, has lambasted Trump’s tax policy as reckless and short-sighted. The country’s top earners will almost surely see their taxes go up in coming years. For now, it seems the middle- and lower-classes are spared the tax collector’s ire, but it won’t last. The national debt is soaring; it’s on track to hit $30 trillion before year’s end.
“It seems logical that taxes would have to go higher to pay for our government’s debt,” the adviser said.
Already in 2017, when Republicans slashed taxes, Democrats and economists alike cried fiscal immaturity. Many have spent the last four years promising to repeal Trump’s tax plan. It looks like Biden won’t be the one to do it, but he’s only delaying the inevitable.
The taxman cometh; ye be warned.
Other business news
• The state treasurer of North Carolina, Dale Folwell, will be visiting Chatham’s Chamber of Commerce on April 14 to discuss the pandemic’s effect on fiscal health.
“Treasurer Folwell looks forward to updating the members of the Chatham Chamber of Commerce about the economic impact of COVID-19 in North Carolina and how the state is doing financially overall,” Joah Bickley, intern to the treasurer, said in an announcement. “As chairman of the Local Government Commission, Treasurer Folwell is uniquely suited to talk to your members about the impact the slowdown will have on local governments and businesses across the state. After his brief message, he will open the floor to questions from participants to ensure open communication and transparency from the Office of the State Treasurer.”
If you’d like to attend, RSVP by email to CherylL@ccucc.net.
• The Chatham Chamber of Commerce welcomed five new members last week. They are the Pinehurst Medical Clinic, a locally owned and managed healthcare provider serving Chatham and eight other counties across the Piedmont; Sentry Residential, a military-based real estate firm “serving the military first but helping all people;” M2Graphics LLC, a screen printing and embroidery store; Island Express LLC, a transportation company specializing in “the safe, efficient, and reliable remediation, transport, and disposal of various liquids, solids and sludge for manufacturing plants, industrial sites, landfills and spill/accident sites;” and Kinsey @ Donian Marketing, Inc, sales representatives for the automotive aftermarket collision repair industry.
• The Modern Woodsmen of America, one of the country’s largest fraternal benefits societies with more than $15 billion in assets, recognized J.B. Griffith III of neighboring Randolph County last month as one of its top salesman. For his accomplishments, Griffith was named to the organization’s president’s cabinet.
“This distinction recognizes Griffith’s high achievement in the sales of financial products to meet families’ protection, savings and retirement needs,” the society released in a statement. “Griffith ranks among the organization’s top representatives nationwide.”
The local Modern Woodmen office is located in Liberty. To enlist the group’s services, contact Griffith at 336-622-6020.
Reporter D. Lars Dolder can be reached at dldolder@chathamnr.com and on Twitter @dldolder.