Dear Michael: We have read your past two articles about deferring income until later on in our life. But isn’t that just putting off the inevitable? Won’t we still have to one day pull out those funds and pay income taxes? Why does it make sense to defer it from now when we’ll just have to pay income taxes in the future? Right now, we have some deductions to work with, but later we may not. What do you say about this?

– Taxed Now or Later.

Dear Taxed Now or Later: In essence, it would appear that you are going to pay the same amount in taxes later as you would today, and percentage wise, that may be true.

However, let’s do some simple math.

If you put modest sums aside – say $75,000 per year over 10 years’ time – during this time, the pension has to make a minimum 3 percent interest by law – federal law – but typically these funds do about 4 to 5 percent.

Without getting too mixed up in technicalities, let’s say these deposits saved you roughly $300,000 in taxes over that time – that’s $300,000 you would have put into IRS’s savings account (which pays you a horrible interest rate because you’ll never see that money again).

Now this $300,000 at interest – money that would have been in IRS’s account – is now earning interest money for you. Over this same time period, this $300,000 in tax savings could have earned you close to another $60,000 in interest earnings, approximately.

Now, you may have to pay the $300,000 when you pay taxes later on – that much is true. But unless the IRS raises taxes on those interest earnings to 100 percent, aren’t you going to come out ahead?

You have $60,000 in interest you wouldn’t have had before and you still pay a maximum of 40 percent on this. This leaves you $36,000 ahead by my simple math. You made money by keeping your money at interest versus letting the IRS take it.

This is a pretty simple example and doesn’t use a very long time or a very large deposit.

Imagine if you made $100,000 deposits during really good years and then backed off when you didn’t have such a good year.

The best thing about the “cash balance” pension plan is it’s a percentage of your earnings. If you have little or no earnings, you’ll make little or no deposits to your pension fund. If you have high earnings one year and want to sock more away, you can put as much as 60 percent away. You’re not locked into a certain dollar deposit each and every year.

The second part of this is that your pension funds can be accessed for tax-free reasons. If you need long-term care, you can access tax-free funds. If you have a terminal illness, you can access up to 70 percent of the funds tax free. If you have a critical illness – heart surgery, cancer, etc. – you can also access large percentages of your pension tax free.

Now, if you’re a man, there’s about a 70 percent chance one of these life events is going to happen to you. With this pension plan, if that should happen, you can take out your money tax free. That’s a 70 percent chance you’ll get a good percentage of your money back without having paid any income taxes. If you’re a woman, chances are a little better than 50 percent.

That’s a pretty high volume of people who took huge tax deductions and will get the money tax-free. If you wonder how the other half lives, and gets by without paying taxes yet lives well, this might be an idea that works for you.

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Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at


Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota.