The Tax Training is Coming--Why it is sure to derail most Americans?
Jan. 2011, David Walker, pronounces that tax rates will have to double or our country will go bankrupt!
Who was David Walker and why should we care? Comptroller General of United States and head of the Office of Government Accountability. He was our country’s CPA and our nation’s chief auditor serving under the Clinton and Bush administrations.
Why? It’s a 4 letter word that’s not “debt”, “wars” or “kids”. It’s MATH!
Social Security Act was passed into law in 1935 as a lynchpin of Roosevelt’s “New Deal” with America. At the time, there were 42 workers putting money into Social Security for every 1 person who took it out.
The average retirement age was 65 while the average life expectancy was 62. So, if you made it to 65 you usually only had it for a few years before you died.
Then, WWII happened and “baby boomers” had 32 million less children than previous generations creating a shortfall in projections.
S.S. costs the country more than $700 billion a year (20%) of our annual fiscal budgets and the number of workers compared to people taking out will be 2-1.
Add to that Medicare which costs more than $500 Billion a year and these two programs will bankrupt the U.S. The government says that the actual cost of these programs long term is $42 trillion and we don’t have that money sitting in an account and if you add inflation to that number the reality will be about $120 trillion in 50 years.
Of every dollar the U.S. takes in 76 cents goes to fund these programs. (S.S., Medicare, Medicaid, & Interest on national debt.) This amount increases this year to 92 cents on every dollar to pay for these programs.
Taxes were started in 1913 taxes were at 1%, by 1943 it was 94% on any income over $200,000. By the 1970’s taxes were reduced some to 70% over $200,000.
Congressional Budget Office states that if there are no changes to S.S., Medicare and Medicaid, the lowest tax bracket from 10% to 25%, 25% would go to 63% and the 39% tax bracket would go to 88%!
The only way to protect yourself from these tax changes is to change your tax bracket! If your tax bill is Zero, Zero times Zero is still Zero. That is the power of Zero!
How do you get off the TAX TRAIN that is currently running toward you at an alarming rate?
Strategic Planning of 3 money buckets:
1. Taxable Bucket
(C.D.s, Money Market, Stocks, Bonds, Mutual Funds, 401(k)
Purpose: Provides a cushion against life’s emergencies
Benefits: the free match, liquidity, easy access
Downside: Taxes, Inflation, Volatility, over threshold makes S.S. taxable
2. Tax Deferred Bucket (IRAs, 401(k)s, 403(b), 457s, SIMPLES, SEPs)
Purpose: Save for a future date of retirement
Benefits: Contributions are tax deductible, grows tax deferred.
Downside: Distributions count as ordinary income, RMDs, you are a partner with IRS. Depending on when you take it out determines your taxable rate and you don’t know what that is yet! S.S. threshold is now up to 85%. ($32,000-$44,000 the rate is 50%, Over $44,000 is 85%) It’s much worse for single people. ($25-$34,000 is 50%, over $34,000 is 85%)
3. Tax-Free Bucket (Roth IRA, LIRP)
Purpose: Pay less in Taxes During Retirement
Benefits: Roth-after tax contribution means no taxes later, doesn’t affect income levels later making s.s. taxable
LIRP- positive arbitrage, accelerated benefits, doesn’t count as income against S.S. threshold, Grows with no capital gains later, no 59 ½ age restriction for access, includes permanent life insurance, no contribution limits, multiple accumulation crediting strategies, passed to heirs tax free, no legislation risk.
Downside: Roth-contribution limits, income restricted to participate, may be dissolved in the future.
LIRP-underwritten and must carry enough justifiable life insurance, LIRP fees are higher in the early years than other investments but level out to about .11 of 1% for the life of the policy after the money is at the highest levels. Would you rather pay fees on the “seed” or the “harvest”?
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