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Monday, September 27, 2010

Those "Evil" Bush Tax Cuts, are they for the Rich??

People are having this debate about the "Bush" Tax cuts being reversed. The claims that the "rich" were getting a larger tax break is part of the argument for the reversal of these cuts. The other side believes that it will encourage economic growth if the cuts are held in place. Whatever side you are on, this will impact your retirement savings.
If you are 59 1/2 or younger(or currently retired), you better be seriously concerned. Your 401k withdrawals after 59 1/2 are taxed at earned income tax levels. In other words, IF you have the need to withdraw $1,000,000 or more out of your 401k plan, you may find yourself "rich". Being "rich" has its advantages, but for the IRS provides us the greatest advantage by collecting 35% of our hard earned money!! Ouch!! If your objective is to accumulate $1,000,000 for retirement, you will provide approximately $350,000 to the IRS. This is assumed that this is a lump sum withdrawal.
The experts say you will be in a lower tax bracket at retirement. Really? If that is the case, why is there a debate about raising the Earned Income tax rate schedule? I never understand why people listen to the "experts" on the TV or radio, they dont know your personal situation and retirement planning is not a cookie cutter process. Its also not known what the tax rates are going to be in the future, but its safe to assume they will not be lower based on the current deficit and debt load by the US govt. See the link at the top of this blog??
Each Qualified retirement plan(401k, 403b, Traditional IRA) has 2 tax benefits. With 401k type plans, you get the tax deduction upon contribution, tax free growth(no capital gains!!!), then you pay the taxes at the current income tax rates upon withdrawal. So here is the Congress seeking to take a Tax increase on your retirement money! You saved taxes on a lower tax bracket, and you will withdraw and pay full taxes on a higher tax bracket. Here is the other kicker: Capital Gains tax rates are LOWER than the Earned Income Tax rates. You may have been better doing a "buy and hold" strategy outside of the 401k and saved more money! "Doh"~Homer Simpson..
How do you have a Tax Free retirement? You must first work with someone who understand which lines in the Tax Code that max out all the benefits for retirement accumulation....That search can end right HERE with us!!

Here are the current Tax Brackets as of 2010:

Tax Bracket Single Married Filing Jointly
10% Bracket $0 – $8,375 $0 – $16,750
15% Bracket $8,375 – $34,000 $16,750 – $68,000
25% Bracket $34,000 – $82,400 $68,000 – $137,300
28% Bracket $82,400 – $171,850 $137,300 – $209,250
33% Bracket $171,850 – $373,650 $209,250 – $373,650
35% Bracket $373,650+ $373,650+

Keep in mind these are the current rates, set to expire after 2010. Here is an article discussing the implications of the Bush Tax cuts in case they expire: "What to Expect if the Bush Tax Cuts Expire" Its an excellent read! If you have concerns about your current 401k plan, and you wish for FREE information on how to have a Tax Free Retirement, please contact me for the FREE Info!!

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