No, Virginia, Your Retirement Account Isn't Obsolete

Last year's tax cuts convinced some that retirement accounts no longer matter. That's absolute nonsense.

MAJOR CHANGES IN the tax law almost always spawn misbegotten new strategies. The most misbegotten I've heard in a while is this: Reduced individual federal income-tax rates (from last year's legislation) have rendered your tax-deferred retirement account obsolete.

What makes this theory dangerous is that it actually seems to make sense on first blush. On second blush, of course, it doesn't. In the interest of being totally fair and balanced, I'll explain the anti-retirement-account position before explaining why it's dead wrong.

The Anti-Retirement-Account Manifesto
Write-offs for your retirement account contributions are now worth less than before because of lower tax rates. True. In addition, dividends and long-term capital gains earned inside a tax-deferred retirement account don't qualify for the current 15% maximum federal rate or the even-lower 5% rate on dividends and long-term gains that would otherwise fall within the 10% or 15% rate brackets. Also true. Instead, dividends and gains that accumulate inside your tax-deferred retirement account will eventually be taxed at your regular federal income-tax rate when you take withdrawals from the account. Your regular rate on those withdrawals could be as high as 35%. This is all true.

Therefore, according to the anti-retirement account forces, the new-and-improved strategy is to save for retirement by plowing money into taxable brokerage firm accounts and then investing in equities (common stocks and stock mutual funds). That way, you would reap the tax-saving benefits of the ultra-low 15% or 5% rates on dividends and long-term gains. Since your tax-deferred retirement account is now an outmoded relic of the past, you would be smart to cease making deductible retirement account contributions right now and get with the new program.

The Pro-Retirement-Account Response
The only thing wrong with the new program is it doesn't actually work! Even after all the recent tax-rate reductions, you're still virtually certain to come out ahead by continuing with the traditional approach of making deductible contributions to your tax-deferred retirement account. I realize this is very boring, but facts are facts.

Please don't take my word for it. The numbers tell the story. To generate those numbers, I had to make some assumptions. Here they are.