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Tuesday, Jun 6, 2023

Potential Crisis Looms in Retirement Plans

Potential Crisis Looms in Retirement Plans GUEST COLUMN By Bruce Weide First of Three Parts I’m not a proponent of raising taxes, but I truly believe the writing is on the wall for the coming decades and you’d better be ready. Let’s put some things in historical perspective. Today, the top Federal Marginal Income Tax Bracket is 35 percent. You’ll qualify for that same bracket whether your taxable income is $312,000 or $312 million or $312 billion. Think that’s a high tax bracket? If you do, you better look again. In 1945 taxpayers with incomes over $1 million faced a top rate of 94 percent! Remember the Reagan Revolution? It was all about lowering oppressive tax rates, wasn’t it? The Economic Recovery Tax Act of 1981 lowered the top personal income tax bracket down to 50 percent. And in 1986 it was lowered again down to 28 percent. Now how can you possibly make such drastic cuts in tax revenue and still keep the federal government intact? Well, the answer in the 1980s was to borrow. And thus deficit spending really took off in earnest but only for a little while, mind you. Once all of our incomes climb back up so will revenues, right? Well it’s 2004 and guess how we still run our government. Now you’re getting the picture, we still borrow. See “The National Debt to the Penny” at http://www.publicdebt.treas.gov/opd/opdpenny.htm for the full perspective. In 1950 we owed approximately $256 billion. Over the next 30 years the debt roughly 3.6X’d to $930 billion and change. Over only the next eight years it 2.7X’d to $2.6 trillion. And where are we today? Try $7.2 trillion after adding over $110 billion in just the first 6 months of 2004. Now, in the event of a true national crisis don’t you think the case could be made that our historically generous 35 percent top marginal bracket has just a little wiggle room to start creeping back up? Heck, maybe 50 percent wasn’t so bad if Mom and Dad survived it. By the way, the war in Iraq is not the type of true national crisis I’m talking about. It’s too small in scale. I’m talking about the social endowment program’s train wreck coming in the next decade or two. Put your ear to the tracks and listen to it coming. According to the Social Security Administration’s Website at www.socialsecurity.gov/qa.htm, they state,: “Social Security is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. There will be a massive and growing shortfall ” “People are living longer, the first baby boomers are five years from retirement, and the birth rate is low. The result is that the worker-to-beneficiary ratio has fallen from 16-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio there will not be enough workers to pay scheduled benefits at current tax rates.” Now, if you’re lucky you have a financial planner who has taught you not to count on Social Security, and you’ve got solid retirement income planned even without Social Security in your future. But has your planner also allocated for your retirement plan to include paying for the other guys who will be out on the streets when Social Security goes bust? Don’t worry too much. Congress probably won’t wait until it gets that bad to raise revenues. And some say the Medicare train may be coming full speed right behind on the tracks, as well. Look, the point here is that two major forces coming together in the next couple of decades in this country, and something’s got to give. Congress needs even greater sums of revenue to prevent being totally swamped to provide payouts to legions of Baby Boomers coming into retirement. But you can’t just keep borrowing money to make ends meet. Targeting Qualified Plans What I find troubling is that when I speak with small business owners and key executives the vast majority are at risk because they have been advised in only one narrow strategic direction in their retirement plans “You should always deduct your contributions today and let all your retirement income be taxed upon withdrawal.” This is the premise that almost every Qualified Retirement Plan is based upon, including your 401K, or Defined Benefit Plan. They’re all the same in this respect: Taxes due upon retirement. At what bracket? We don’t know! Bruce Weide is the author of “Getting Rid of Taxes in Business and Retirement,” and CEO of TAX-FREE Benefit Specialists and Insurance Services, a financial service firm dedicated to bringing Fortune 500 tax-planning and retirement saving strategies to small and mid-size businesses. Headquartered in La Crescenta, he can be reached at (818) 896-5958 or at taxfreebenefits@aol.com

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