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Missed Fortune – Act Now to Create Certainty Later

Posted on | September 23, 2012

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Why Taxes Are Sure to Go Up

It took 100 years for our national debt to reach $9 trillion. To illustrate just how quickly that debt continues to pile up, consider the fact that it has expanded from $9 trillion to over $16 trillion in just the past 5 years.

At this rate it will have more than doubled in less than 8 years.

Every penny of tax revenue that is collected is allocated to pay interest on the debt as well as the mandatory programs like Social Security and Medicare. That means that the additional $1.3 trillion that’s required to run the federal government is all borrowed.

That leaves us with a couple of difficult choices: raise taxes or shrink government.

It’s a pretty safe bet that our current political leaders aren’t about to cut back on their own jobs. Instead, they’ll be looking to raise taxes.

Any tax hikes have the potential to affect all of us, not just the rich. So it’s essential that we pay attention to what our political leaders are doing and protect our retirement savings from those coming tax increases. Remember, every single person in America will see the tax rates on the first $17,000 they earn jump from a 10% rate to a 15% rate.

For married couples, every dollar you earn above $70,700, the tax rate will increase from 25% federal rate up to 28% when the Bush tax cuts are allowed to expire. It will not affect the rich only.

All of this translates into continuing uncertainty that is felt throughout the economy. If we were to remove the uncertainty, the economy would respond favorably. Right now, economic growth is being held back by the anticipation of higher taxes. This means that fewer employers will be willing to hire or grow their businesses when they stand to have more taken away in higher taxes.

The Benefits of Acting Sooner vs. Later

The answer to this dilemma is found in learning how to create certainty and predictability for a sound future where we know that we will not outlive our retirement money and that it will be safe from the ravages of increasing taxes and inflation. One of the best ways to create this type of certainty is to assess what you’re doing and take action if necessary to protect your money.

For instance, if your money is sitting in a traditional retirement account like a 401(k) or an IRA, those higher taxes will be hitting you at the worst possible time. Taxes will not be going down, and by deferring those taxes to a future date; you run the risk of paying a higher tax rate than when you were working. Not only is congress likely to raise taxes, but also you’ll have none of the deductions to claim that you enjoyed during your peak earning years.

Instead of postponing those taxes for some future perceived advantage, it’s better to take care of them now, at today’s rates, and get your money into a tax-advantaged vehicle.

The good news is that once your tax obligation has been satisfied, your money will accumulate tax-free from that day forward. Thanks to IRS code rules that have been around for generations, you’ll pay no further taxes on that money as you access it during retirement. Better still, that money will transfer tax-free to your heirs when you reach the end of your life.

It’s like when you’re driving down the highway and you get a chip in your windshield, you can either take care of it now by getting the chip fixed, or you can wait until the chip becomes a crack that spreads and ends up requiring that you replace the entire windshield.

By acting now, you incur less costs than if you procrastinate taking care of the problem. The same principle holds true with protecting your retirement nest egg.

It’s a matter of having the right strategies in place now.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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