AS IF we need to hear any further “noise” about the debate in Washington, DC regarding tax policy. There is a basic silver lining (or two) to the discussion worth pointing out. First, a quick review of the big-picture elements in the limelight:
- The number and rate of Individual tax payer brackets (15%, 25%, 35%, etc.)
- The corporate tax rate (20%? 35%? pass-through? etc.)
- Individual retirement savings vehicles and allowances (IRAs, 401k, “Roth-i-fication”, etc.)
Might I offer TWO “silver linings” to this prolonged, politically entrenched back-and-forth on tax policy:
1: For those paying attention amidst the noise, there is a massive amount of education being put forth about the account vehicles that are currently – and likely to remain – in place for saving for retirement. It does not matter if you own your own company and are maxing out your retirement contributions, if you are “switched on” and maxing out, if you have been saving for decades, OR if you are early in the task of saving. Here are the essentials at the heart of the discussion each and every day:
- The types of retirement accounts available for individuals
- primarily these are IRA, Roth IRA, 401k, 403b
- The tax treatment of your retirement savings
- pre-tax/tax-deductible or after-tax
- the primary savings vehicles for employees vs. business owners
- employees: 401k, Roth 401k, 403b
- business owners: SEP-IRA, SIMPLE-IRA, 401k, Roth 401k
Forget about the politics and back-and-forth. These 3 things are the keys (among others such as account titling, trusts and insurance) to YOU being able to retire someday and minimize taxes along the way. These are the basic tools already in existence that can be used by almost anyone wishing to retire someday or for someone who dreams of amassing a “nut” of savings for a future time.
2: This one involves math and the power of compounding for those who are “behind” in saving (PS. see below: “Saving is still 100% absolutely necessary”). I read a great piece of data recently** that although harsh in terms of dollars needed to be saved shows how, at age 50, that you can potentially “catch up” and have hope to retire. It requires discipline and significant financial contributions but is a realistic possibility.
The data presented said that a 50-year old who has only $200,000 in his or her 401k plan (which is NOT enough to retire) has the chance to end up with $1.002 million by age 65 IF (among other behavioral and investing factors) they max out – that means contribute $24,000 per year on a pre-tax basis (today’s rules) to their 401k – every year until age 65. The data says the result could vary slightly if some of the tax-deductibilty of contributions is taken away.
- What if “they” take away your tax deduction for IRA or 401k contributions?
- What if they allow the over-50 crowd to deduct only a portion of their retirement contribution?
Saving is still 100% absolutely necessary. Yes, tax deductions in the present help – and most IRA deductions will likely remain similar to today. The Roth IRA (for those whose income is below a certain level) and Roth 401k accounts (which carry NO limits on income) already use after-tax contributions and feature tax-FREE income later in life, and sometimes sooner.
Save today, use the resources available to you – which will still be available for the foreseeable future in similar form. And ask for advice on any of the more complicated aspects of this noisy time for tax policy.*
*Consult your tax adviser on ALL tax-related matters.