|
DebtFreeGuru.com's - Tip of the Week - Monday, June 23, 2003 |
|
|
If you can't read this newsletter or it's in any way garbled, just click the Reply button and type a brief note explaining that you can't read the newsletter. We'll get you one you can read right away! (Always feel free to forward) |
|
|
My Money Center "...a new thought company" If you or someone you know is struggling or unable to meet your obligations Contact Me for a FREE no obligation evaluation to see if one of the My Money Center Programs is right for you! Or Call 813-354-2563
Click here to order your credit report, credit monitoring service or Credit Scoring Analysis!
•
My
Personal Invitation |
(Please
read my commentary at the end of this article!)
How
the Tax Cut Changes Your Retirement Planning Lower
rates on dividends and capital gains change some of the traditional
strategies when it comes to 401(k)s and IRAs. Annuities weren’t looking
good before; now they’re positively radioactive. By
Liz Pulliam Weston (As seen on MSN.Com)
The new tax law didn’t create any new ways to save for retirement, but it did change the rules for some time-tested investment strategies.
For one thing, the Jobs and Growth Tax Relief Reconciliation Act of 2003 makes saving in taxable accounts considerably more attractive. Dividends and long-term capital gains (on investments held 12 months or more) are now taxed at a top rate of 15%, down from the previous maximums of 20% for capital gains and 38.6% for dividends.
The rate drops to 5% for singles with taxable income under $28,400 and for marrieds with taxable income under $56,800. There’s even a bonus waiting for these lowest-income taxpayers: no tax on capital gains and dividends for one year, in 2008 (assuming Congress doesn’t extend the new round of tax cuts).
“When the penalty for being in a taxable account goes down (by reducing tax rates),” said Mark A. Luscombe, principal analyst for tax research firm CCH Inc., “that makes them a little more attractive relative to tax-deferred accounts.”
Most retirement accounts require you to pay regular income taxes on withdrawals. You also typically face penalties for tapping your money early -- something you don’t have to worry about with a taxable account.
Does that mean you should abandon your 401(k), 403(b), IRA or annuity? Here’s the analysis, courtesy of tax and retirement experts from across the country.
401(k)
and 403(b) plans
“There’s a little less bang for your buck in every tax bracket,” said Brett Hammond, director of portfolio studies for TIAA-CREF.
The change is most dramatic for married couples who used to be in the 27% bracket but who are now in the expanded 15% bracket (taxable income of $56,800 and below). They used to save up to 27 cents in taxes for every dollar contributed to a workplace retirement plan, but now the break has shrunk to 15 cents.
Now add in the uncertainty of future tax rates. If you expect to be in a higher tax bracket in retirement (because your income will rise over time, your investments will pay off or Congress will change the tax system again) you may be better off paying today’s lower taxes rather than waiting to pay higher taxes in the future. That would involve investing in a taxable rather than a tax-deferred account.
Most
people shouldn’t stop their workplace retirement contributions, though.
For one thing, a tax break in hand is usually worth two in the theoretical
or future bush. Plus:
Your
contributions to a 401(k) or 403(b) reduce your adjusted gross income.
That means you may qualify for other tax breaks that could be out of reach
with a higher AGI. If you’re single, for example, you begin to lose the
ability to deduct student loan interest when your AGI exceeds $50,000.
(You can’t deduct it at all if your income exceeds $65,000.)
You
probably need the discipline of regular payroll deductions if you’re
going to save much for retirement. (The penalties for early withdrawal
also should help you keep your mitts off your nest egg, so that you
don’t spend it before you even get to retirement.)
The strategy: For most folks, it still makes sense to contribute the amount necessary to get the full company match. Then, contribute up to $3,000 a year to a Roth IRA. If you can save even more and expect to be in a higher tax bracket in retirement, you can consider a taxable account for your additional investments. But do the math first to make sure you’re not losing valuable deductions because of a higher AGI. If you don’t want to gamble, make your extra contributions to your workplace retirement plans and enjoy the tax break, even if it is a little smaller than in the past.
Individual
retirement accounts
How about if you have a choice between a Roth and a deductible IRA? Again, lower tax rates lessen the appeal of the deduction, and those who expect to be in the same or higher tax bracket in the future might want to gamble by contributing to a Roth instead. (Roth IRAs also have the benefit of more flexibility: Unlike IRAs, you can always withdraw your contributions without penalty and you’re not required to make withdrawals in retirement.)
Annuities
“They (annuities) really have lost their luster,” said Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal for tax professionals. “There’s even less reason to invest in them now.”
Here’s why: Earnings in annuities grow tax-deferred, but they’re taxed at regular income tax rates on withdrawal -- up to 35% currently. That compares with the 15% capital-gains and dividend rates you would pay on a comparable long-term investment in stocks. Insurers are fighting for more favorable tax treatment for annuities, but so far without success.
Annuities also tend to have surrender fees if you bail out early and higher expenses than comparable investments that don’t have the death benefit provided by the insurance wrapper. Those expenses, combined with the wider gap between capital gains and income tax rates, mean investors need to hold low-cost annuities for at least 20 years to break even. That’s according to calculations by the folks at TIAA-CREF, the world’s largest pension fund manager and an annuity provider.
However, you might choose annuities for other reasons. The death benefit guarantees your heirs will receive at least the same amount as you invested, even if you die when the market is in a swoon. If you’re an active trader and don’t hold your stocks for at least a year, you also may want an annuity’s tax-deferral feature because you won’t qualify for long-term capital gains rates anyway.
Where
to hold what
They wrote long, formula-filled papers for professional journals proving that bonds should be held in tax-deferred accounts and stocks in taxable accounts -- or vice versa.
Congress just made the issue somewhat clearer, says Steve Norwitz, a spokesman for T. Rowe Price and one of the authors of those long tomes. (He argued, rather convincingly, for the stocks-in-tax-deferred-accounts side.)
Bonds, which generate interest that would be taxed at regular income tax rates, are typically better off held in your tax-deferred accounts, while the new capital gains and dividend rates mean stocks held for the long term should do better in taxable accounts.
“Should” is the operative word. The outcome depends on many variables, including the relative future performance of stocks and bonds, how long you plan to invest, your tax rate when you withdraw the money and, as always, what Congress may do to change tax rates in the future. If you decide to alter how you divvy up your investments, you’re probably better off doing so with new money, Norwitz said, rather than rejiggering your whole portfolio and perhaps incurring more taxes.
Commentary - John Moore I and many others have a real concern over using tax deferred retirement vehicles. The original logic was that we would put money into the accounts avoiding what was perceived as our higher tax rates, building tax deferred and then withdrawing that money after retirement, when we are supposedly at lower tax rates.
Historically financial planners told us that we needed about two-thirds of our pre-retirement income after retirement. Planners today now suggest that we need to have income that equals or exceeds our pre-retirement income. Now leaving us in the same or higher tax brackets after retirement as before.
But a bigger concern is the possibility of significantly HIGHER tax rates farther in the future.
The logic for higher tax rates in the future is the aging of the current population, the decline in health of the population as a whole, the HUGE un-funded liabilities that have been created in public spending programs currently estimated in excess of 42 TRILLION in present value dollars and the shrinking of the work force that is being taxed to support those programs.
As stated in the above article, the recent tax law changes have made most of the tax deferred retirement accounts less attractive. With the concerns above, my choice is to maximize contributions to Roth IRA's, which allow contributions to grow tax free and withdrawals at retirement are untaxed although contributions to a Roth are NOT tax deductible, and personal investment accounts which are outside qualified retirement accounts and taxed as you go. |
|
DebtFreeGuru.com - Tip of the Week - Monday, June 23, 2003 • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • Copyright 2003 DebtFreeGuru.com All Rights Reserved. |
|
|
Please
Forward this to Everyone You Care About! It's
Your Money – Keep More of It! DebtFREEGuru.Com
is proud to offer: Conscious Prosperity: The
Secret to Simple and Lasting Personal Wealth By
John Moore - $49.95 - 312 Information Packed Pages! A part of all proceeds is donated to the Ministerial Endowment Fund created to provide financial assistance to ministerial students while in school! Generous Bookseller Discounts for Bookstores! We've partnered with PayPal to facilitate you ordering online! FREE Shipping! - !Order Now! It's
Your Money – Keep More of It! |
|
|
Here's What People Are Saying About Conscious
Prosperity: "Your practical approach to debt resolution has made a difference in my life and in the lives of several members of this congregation. If anyone wants to know how to apply spiritual principles to become debt-free, I'll be glad to send them your way." - Rev. Thomas W. Shepherd, Sr. Minister, Sunrise Unity Church, Citrus Heights, California and author of Glimpses of Truth "People
in our congregation are using John Moore's program to literally change
their lives. His workshop attracted a large crowd and prompted calls to
"bring back that 'debt-free guy!"" "Thanks, John! Your workshop was the best of any kind we've attended
in 36 years of marriage. You
gave us a step-by-step way to manage our money, and now we're debt-free
and watching our savings grow."
"We did not have to cut way back to succeed. The only thing that we had to do was stop spending on credit. We have gone from 12 debts to 4, soon to be 3. We are looking forward to NO DEBTS! Amazing program. Simple and doable!" – Holly and Mark G., Dietitian and Registered Nurse, Tallahassee, Florida |
|
The Author John S. Moore has been facilitating financial planning, cash management, investment and personal growth workshops throughout the United States for more than twenty years.
In hundreds of workshops over the past 10 years, John has taught thousands of people how to live a debt-free, stress-free lifestyle. He teaches primarily at Unity, Religious Science and Science of Mind churches, as well as other churches, schools and corporations around the United States. |
|
Copyright © 2003 John Moore • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • |