Consider the taxes you’ll pay on your 401(k) withdrawals. When you think of the money you’ve saved in a tax deferred 401(k) or IRA, in your opinion, how much of that money is yours?
Imagine you’ve saved $800,000 in your 401(k) and you’re in the 33% Federal tax bracket. See the circles at the bottom of Chart#1. (click photo for larger view)
What if I told you only $536,000 is yours and $264,000 belongs to the IRS. How do you feel about that?
Did you know that average for the top tax bracket in the United States from 1913 to 2011 has been 61%? If that became our reality in the future, then your share of ‘your’ money would be $312,000 and the IRS’s share would be $488,000. See Chart 2. (click photo for larger view)
Let’s take another look at this chart. Whenever you see a spike on the chart, it’s because the government had a crisis that needed funding. The first spike to 73% on the left side of the chart was to pay for World War I. After WWI, the economy was strong through the Roaring 20’s. But after the market crash of 1929 and the ensuing depression, the government raised taxes to ‘help’ our way out of the depression.
Income tax rate reached 94% at the end of World War II. Of course, this rate applied to the highest income earners, but there’s a sliding scale where the rest of the people are paying their share, as well.
The Korean War and the rebuilding of Europe and Japan kept rates at 91% until President Kennedy brought them down to 70%. Except for a blip to pay for the Vietnam War, they stayed at 70% until the early 1980s.
Do you remember the famous E.F. Hutton television commercials in the 1970s and 1980s? “When E.F. Hutton talks, people listen.” Do you know E.F. Hutton was talking about? He was helping people who didn’t want to pay the 70% taxes of the day.
Taxes dropped to generational lows during the Reagan administration and we can say they’ve been ‘On Sale’ for the past few decades. Especially when compared to the average of 61% during the past 97 years.
Take a look at the right side of the chart. What’s missing?
Remember 2001, especially 9/11? That led to the War on Terror, the War in Iraq and the War in Afghanistan. They were expensive exercises, but do you see a spike in taxes yet to pay for those wars?
There are also the unfunded entitlements the government has promised to baby boomers who are beginning to retire. We can’t forget the deficit that needs to be addressed, either.
How will that be paid? Most people today have this sense that we’ll see higher taxes in the future?
Fortunately, the top tax bracket today is 35%, well below the average of the past 97 years. But there are rumblings that the pendulum will begin swinging back from the low rates we’ve enjoyed for the past several years and move toward the historical averages.
If tax rates go up to 50%, under the long term average of 61%, now half your money is yours and half your money is Uncle Sam’s. How do you feel about that?
What can you do?
You need to understand how qualified plans work. Saving money in your tax deferred 401(k) or IRA only postpones the taxes due to the future. And, if Congress needs extra money, with the stroke of a pen they can raise taxes and further reduce your share of your qualified plan.
What do you think you should do about that?
If there were a way to save for your future where your money grew tax deferred, protected from market risk and you could access it tax free, penalty free, before age 59 ½ would you want to know how? Learn how to Avoid the 401(k)/IRA Tax Deferral Trap. Read more HERE
Call Scott Scholz, independent Registered Financial Consultant to discuss how to avoid this costly and unnecessary wealth transfer. 425-829-4110.