Why the IRS is a Dirty Word

Taxes! That single word may have sent a shiver up your spine, or caused you to groan. It seems the government is always out to take all of your hard-earned money. You’re half-way right. But it’s not the government who wants your money. It’s the IRS.

You see, the IRS has found a multitude of ways to take your money, without you even realizing it. It has even convinced businesses and banks to push their schemes on an un-assuming America. The IRS wants your money, and they trick people into giving them their hard-earned money by slinging around the term “tax-free.” More than likely, if you fall for this, the IRS will get something from you, so the taxes you did not pay make it a wash.

Who wants to pay more taxes? Everyone hates paying taxes. So, when something is being advertised as tax-free, people get way too excited. This is how the IRS sets the trap and then they sit back, crack their knuckles, and watch with excitement as millions of people take the bait.

How do they do it? You ask. It’s simple enough, really. The IRS lures folks in by offering tax-free retirement investments.

The IRS came up with several retirement savings accounts under the guise that they are helping Americans save for their Golden Years. There are 401(k)s and IRAs. I am sure there are more, but these serve as examples. They are pushed in nearly every company, and every financial magazine and bank across America. All of them are disguised as vehicles for saving. Here is how they work:

What is a 401(k)? This is a nifty little option available to most employees of major companies. You invest money into your 401(k) and if you’re lucky, your employer will match your investments. These investments are tax-free or tax-deferred. Either way, the IRS takes your money, and invests it into different funds, in the hopes of making money supposedly on your behalf. When you reach a certain age, you are then entitled to your investment and the earnings on your investment – get this – tax-free or tax-deferred. However, if you withdraw that money before retirement age, guess what? You pay a penalty. That’s right. You pay money to the IRS if you choose to access your hard-earned money before the IRS wants you to. Even worse, if the IRS does a poor job investing your money, you may actually LOSE what you’ve paid in.

Okay, so that kind of sucks. Well, then, how about an IRA? An IRA is an Individual Retirement Account. This is a great option if you want to give your money to the IRS, but your company doesn’t offer a 401(k). Basically, an IRA works like this: you put your money in, and when the IRS decides you are old enough, you get your money back. Again, the amount you get back depends on if the IRS did a good job and made lots of interest off your money, and like the 401(k), the IRA is riddled with many rules and stipulations, and heavy penalty fees if you decide you need your money back before you are old enough to retire.

Now, it is hard enough to commit your hard-earned money to a Certificate of Deposit or a government bond. Your money is locked up tight for a period as little as one year. If you withdraw early, you subsequently pay a penalty. However, you are guaranteed to get your money back, plus a little bit of interest, but geez, there’s always some emergency that might come up that will keep you from investing your money here. You never know when you may need that money.

Take that idea a step further. Lock your money up until you hit age 65. Tell me you’ll never need to tap that resource. It’s near impossible. So you tap your 401(k) or your IRA. Whammo! You took the bait out of the trap the IRS has set. You’ll pay penalties and even possibly taxes, all because you needed a little bit of money early. The penalty you pay may even be more than any earnings on your money. And to make things worse, you may even have to pay back the money you borrowed from yourself at a time and amount that is not comfortable for you.

This is how the IRS tricks you into willingly giving them money. If it’s advertised as tax-free, you can be guaranteed there are heavy penalties and mind-bending rules to make up for it.

Even though individual investing is discouraged at every turn (mostly because earnings are taxed), I would personally prefer to invest my money myself, and manage it and grow it myself, and (gasp!), pay taxes on the earnings. You don’t hear Donald Trump or Warren Buffet whining about paying taxes on their earnings. Why? Because the bottom line is, you will never pay more taxes than what you have earned. Period. If you invest on your own, you will pay taxes on your earnings, but not so much taxes that you will not make any money at all. You will still come out ahead, and odds are, you’ll make a ton more money simply because you’re putting your retirement solely in your own hands, which will force you to become a prudent spender and a wise investor. Plus, if you have an emergency, you can access your money with no penalty. You don’t need to put yourself in a bind if you can’t pay yourself back right away, either.

Anytime something is being advertised as “tax-free,” you can bet that the IRS is behind it. And that, my friends, is why the IRS is a dirty word.