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Missed Fortune – The Fiscal Cliff Avoided, Now What?

Posted on | January 6, 2013

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What Actually Happened

When Congress avoided the so-called fiscal cliff on New Years Day, it’s unlikely that anyone read the bill before passing it. What that bill accomplishes is still largely a mystery to many, since the media tends to report the matter only in the most complimentary terms.

Some of the Bush era tax cuts were extended temporarily, but others were allowed to expire. The media is reporting that the tax hikes in the legislation will only affect those earning higher incomes of $400,000 a year or more. But this is only part of the bill’s true impact.

In reality, the fiscal cliff may have been avoided, but there are some key things that this bill does not address. Even if Congress goes the entire year of 2013 without another tax hike, virtually taxpayer will be paying another $500-$1,000 more in taxes this year than last year.

Even though this bill supposedly saved 99% of Americans from a tax hike, we’ll all be paying more since the Social Security payroll tax cuts have been allowed to expire. That will amount to a roughly $1,000 tax increase to a worker making $50,000 a year.

According to the Tax Policy Center, it’s estimated that 77% of American households will pay more taxes in 2013 under this last minute agreement passed by Congress. One reason for this is the cost of implementing Obamacare, which is expected to cost nearly 3 times more than was originally projected. Serious issues like the debt ceiling and spending cuts were never even addressed.

In the end, this legislation turned out to be a temporary fix to an ongoing spending problem that virtually ensures more and steeper tax hikes in the near future.

Immunity From Tax Hikes

What if all the posturing and bluster over Congress raising taxes was something you could simply shrug off as irrelevant? How would it feel to know that your retirement money was immune from tax hikes and continuing market volatility? Would you sleep a little better at night knowing that you had taken the steps to protect it?

People who have chosen to keep their retirement money in IRAs and 401(k)s will not have this luxury. This is because their money is being accumulated in a tax-deferred vehicle that will subject them to those anticipated rising tax rates the moment they begin taking their distributions.

Not only will they be facing almost certain higher tax rates, but they’ll also have fewer deductions to offset their tax liabilities. Their homes will have been paid off; their dependents will have left the nest, etc. It’s entirely possible that many retirees will find themselves paying more in taxes during retirement than they did during their working years.

They’ll also be wrangling with the effects of rising inflation that is steadily shrinking the purchasing power of every dollar they’ve saved.

And with their retirement savings in an IRA or 401(k), their nest egg will be exposed to the economic uncertainty and market volatility that has been so common for the past 10 years.

On the other hand, there are people who have learned how to get their money out of their IRA or 401(k) through a strategic rollout, pay their tax debt now at the lower rate and get their money safely into a vehicle where it can accumulate tax-free from then on.

They’ve learned how to beat the ravages of inflation by tying their returns to those things that inflate. And they’ve learned how protect every dime of their principal through indexing strategies that allow them to participate in every market upside, but protects them during those years when the market declines.

This immunity from the triple whammy of higher taxes, rising inflation and continuing economic uncertainty comes from learning and applying the right strategies and not simply following the herd.

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

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