Taxation While Saving For Retirement

If an American earns enough to save for retirement while they work, their tax scheme starts to get less aggressive and more favorable.

Early Years

During this person’s early years, they likely have parents who are living comfortably from paycheck to paycheck or able to save for retirement themselves. Americans have some of the lowest social mobility among developed nations, so it is highly unlikely that an American who is able to save for retirement had parents who significantly struggled to get by.

When growing up, this American will probably go to college. If this American is especially lucky, that college will be paid for by their parents and they will enter the work force without any significant debt. They will probably graduate college around 22 years old, at which point they may go on to graduate school or go straight into their workforce, entering the workforce likely between 22 and 28, after 4 to 10 extra years of prolonged adolescence.

Working Years

This American enters the workforce after their college or graduate school. They will plan to work until they are in their 60s, and will have a less physically taxing job than a person without a college education, allowing them to work more reliably and making setbacks like pregnancy less significant than they are to a person who is on their feet for their whole job. They will probably therefore have 40 years or more in which they are continuously earning money, which is more than they need each month to support their household, so they are able to use their extra income to accumulate wealth for their retirement.

At first, their excess salary will primarily be paying off debts acquired by going to college or graduate school. As they get older, a larger share of their excess salary will go into their retirement savings and into other forms of savings, like property. The retirement savings will be tax-deductible, allowing this American to delay these taxes until later, when they are retired. This means that this American, at their peak earnings and tax bracket, will be pushing away part of their salary to be paid later at a lower rate. Over the long run, this American’s property may also create unrealized gains, which will not be taxed until the house is eventually sold.

For this American, during their working years, their income taxes will be almost wholly based on their wages which are also subject to payroll taxes. The income they earn from their retirement savings and property are unrealized, so they cannot be taxed yet. The wages that are taxed will also not include their savings for retirement; for this American, they will only be taxed on the amount that they are spending. For this reason, like an American living paycheck-to-paycheck, this American is paying prepaid consumption taxes through their income taxes. This American differs from the American living paycheck-to-paycheck because they are able to delay some of their taxes until they have retired and are subject to a lower tax bracket.

In order to further minimize the amount they owe in taxes, this American might start a business and invest part of their income in the business. Exemptions allow this American to delay taxes on this income until the assets are sold, which can be in retirement or even after death.


When this American retires, he has his accumulated retirement savings and his property to support his golden years. His savings will be spent slowly, taxed now instead of earlier, when they were first earned. If he wants to spend the money tied up in his house but still live in the house, he can leverage a loan against it.

This American’s retirement savings have deferred the amount he owes in taxes. Instead of paying upwards of 37% when the savings were first earned, this American now only pays taxes on the savings that are cashed and spent, which will be closer to 15% or 20%. The same thing happens with business investments that are now sold. If this American saved enough during his life, then he can live off of just his interest, which is taxed at an even lower rate.

This American also has property to take advantage of in retirement. They can take out loans with lower interest rates by leveraging their property as collateral. Then, when they die, the property will be sold and the loans will be paid off; this way, a retiree can live in his house and use the proceeds of its sale to finance his retirement. (unlike buy, borrow, die, this sale will not be tax-free, because the retiree most likely took deductions from their income taxes while paying their mortgage; buy, borrow, die is exclusively available to inter-generational wealth)


A tragic day. An American has died. A joyous day. The will is read.

The retirement savings that went unspent are passed on to their progeny. Taxes are paid for the deferred income and the remainder is inherited.

The progeny by now have their own homes, so they will likely sell the home and use that wealth to pay off the loans that the retiree took out in their last years. Because the decedent likely took deductions from his income to pay his mortgage, these will still be owed to the tax man when he dies.

Next: Read Taxation for the Professional Athlete