Are tax-deferred IRAs or 401(k)s the best fit for everyone?

When determining whether or not tax-deferred accounts are best for you, it's good to stop and think of why you may have starting using one of those accounts in the first place.

There's a story about a husband who was watching his wife prepare a ham for dinner that illustrates this well. The husband noticed that his wife cut off both ends of the ham before placing it in the baking pan.

Curious, he asks, "Why do you cut the ends off the ham?"

She replies, "That's how my mom always did it."

Not satisfied with that answer, he asks his mother-in-law the same question.

She tells him, "That's how my mom always did it."

Finally, they ask the grandmother and she says, "Oh, I cut the ends off because my baking pan was too small—the ham wouldn't fit otherwise!"

The original reason (a practical limitation like a small pan) was long forgotten, but the action persisted through generations purely out of habit and imitation. This perfectly analogizes how people often do things simply because "that's how it's always been done" or "that's what everyone else does", without questioning the underlying reason why. It's mindless replication of prior behavior, even when circumstances have changed or the original rationale no longer applies.

A direct parallel in personal finance is the widespread habit of putting money primarily (or exclusively) into tax-deferred retirement accounts like traditional IRAs and 401(k)s without determining if that is, in fact, always the best decision. Many people do this automatically because:

• Their parents or older relatives did it.
• Their co-workers do it.
• Financial advisors, employers, and mainstream advice push it as the default "smart" path.
• It's what "everyone" recommends—it's the cultural norm in retirement planning discussions.
  
  

But they rarely stop to ask: Why are we prioritizing tax-deferred accounts? The original "reason" for their popularity (higher tax brackets in working years vs. retirement, plus tax-deferred growth) made sense in past decades for many. However, today:

• Tax rates might be lower in retirement (or not—laws change and likely will).
• Roth options (tax-free growth and withdrawals) often make more sense for younger people or those expecting higher future taxes.
• There are other tax-advantaged/tax-free vehicles available today.
• Required minimum distributions (RMDs), potential future tax hikes, or other factors can make traditional deferral less ideal.
• Many blindly follow the "cut the ends off" approach—defer taxes now—without considering if a Roth IRA/401(k), taxable brokerage, HSA prioritization, or other strategies better fit their situation.
  
  

Just like the family wasting ham by cutting off perfectly good ends (when larger pans exist now), people may be "wasting" optimal wealth-building potential by sticking to tax-deferred vehicles out of unexamined tradition. Questioning the why—your current/future tax bracket, time horizon, estate plans, etc.—can lead to better outcomes instead of just doing what those before you did.

The lesson: Habits and defaults are powerful, but blind adherence can cost you (literally, in this case). Always ask why.

Working through the considerations is a service we provide to our clients. If you've never taken time to consider alternatives, book a time with us to explore other options.