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Missed Fortune – Positioning Your Retirement Money For the Coming Tax Hikes

Posted on | March 4, 2012

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Here Come the Tax Hikes

Missed Fortune listeners won’t be terribly surprised to learn that the Congressional Budget Office (CBO) has recently released a new report confirming the likelihood of tax rates going up 30% or more over the next two years.

This will be due to the expiration of the Bush tax cuts at the end of this year and a corresponding massive increase in the national debt.  In just the past 3 years, our runaway national debt has soared from $9 trillion to over $15.3 trillion and there are no signs of it slowing down.

In response, President Obama has been openly calling for higher taxes, which means that married couples earning over $200,000 and singles earning over $100,000 may find themselves paying tax rates as high as 62.5%.  Sadly, a poll taken in late last year indicates that many Americans appear eager to “tax the rich” out of a sense of making the wealthy pay what politicians say is their “fair share”.

What too many of those clamoring for tax hikes fail to understand is that placing higher tax burdens on those who create jobs also tends to produce higher unemployment.  Higher taxes are a powerful disincentive for producers to grow their businesses.

Another segment of the populace that will feel the sting of higher taxes are those who have their retirement savings in 401(k)s and IRAs.  Not only will their tax rates increase, but these individuals will also have fewer deductions available to offset their tax liability.  For many people, there is a possibility that they’ll find themselves in a higher tax bracket than they occupied during their peak working years.

Among the more disturbing revelations of the CBO report, “In particular between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30%, mostly because of the recent or scheduled expirations of tax provisions.”  The report also refers to “the imposition of new taxes, fees and penalties that are scheduled to go into effect.”

What this means, in plain language, is that the tax hikes will be hard-hitting and will be coming from multiple directions.

What Can Be Done

There is a limited window of time, before the end of this year, in which action can be taken to avoid paying higher taxes on your IRA or 401(k).

In order to protect your retirement savings from the effects of dramatically higher taxes, now may be the time to consider a strategic rollout.

This strategy allows a person to move their money from an existing IRA or 401(k), paying the applicable taxes at today’s lower rates, and then repositioning their money into a different vehicle where it can accumulate tax-free from that day forward.  In this scenario, your money remains tax-free when you begin to access it at retirement and ultimately transfers tax-free to your heirs.

Rather than deferring those taxes to a later date—when the rates will almost certainly be higher—or paying taxes on your increase every time your money compounds, you can instead harness the power of compound interest in a tax-free environment.   A good rule of thumb to remember is that a dollar that doubles every time for 20 cycles will grow to over a million dollars, but only in a tax-free environment.

This is a possibility thanks to certain key sections of the IRS Code.

These sections of the Code are entirely legal and have existed in the tax code for many generations.  The only reason they aren’t utilized more often is that many people, including tax attorneys and retirement planners, don’t understand them.

If you miss this window of opportunity to perform a strategic rollout before these tax hikes arrive, you may find that even a sizable retirement nest egg can be drained in just a few short years due to the taxes you’ll be paying.

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