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Pre-tax v After Tax Retirement Savings

Well here it is  New Year! Where does the time go?

In a previous post I intimated that pre-tax 401k contributions may not be the best way to save for retirement. With the very real possibility that taxes will have increased significantly by the time those saving for retirement now begin to access those pre-tax funds they could end up paying more in taxes on the funds later than if they paid taxes on them now.

When the 401k first became popular in the 1980s the top marginal tax rate was around 70% compared to 40% today. Those that are accessing their 401ks now are paying a lower tax rate now than they would have paid at the time they were contributing to the plan. Now take today’s worker. They are contributing at today’s lower tax rates and not paying taxes on the funds when most agree that taxes are going up in the future. How much sense does it make to save the taxes now when you would pay 15-40% depending on your tax bracket, when you can build your retirement fund with after tax dollars now and avoid paying higher taxes on the funds when you retire? Experts agree there is a very real possibility that when those contributing now are 59 ½ or older and begin to access the funds they have not paid taxes on they will pay a higher tax rate on the withdrawals.

What is your sacred cow?

“Ask not what your country can do for you, but you can do for your country” JFK

What is your sacred cow and would you give it up if it would get your country out of financial trouble?

I am a real estate agent and one of the sacred cows of the real estate industry is the mortgage interest deduction. I live in a rural area so my real estate earnings have always been modest. I have never sold a home to someone that was buying a home for the mortgage interest deduction. Most of my buyers are buying to have a home for their families. What this tells me is that the mortgage interest deduction is only useful for those with higher incomes than the average family in America. Don’t get me wrong I am not a “tax the rich” person I am a “tax everyone equally” person. I personally have never used the mortgage interest deduction because the standard deduction has generally covered what my itemized deductions would be. I also hate itemizing though I do both to see which has the best outcome.

I am fast approaching retirement age and I would be willing to give up my social security if it meant that my children and grandchildren would not be spent into oblivion before they had a chance to make a life for themselves. That being said when I first got out of the Air Force in the early 80’s the top marginal tax rate was around 70% compared to about 40% now. The reason things seem tougher now is not the tax rates but the purchasing power of the dollar you earn when compared to 30 years ago. In that last statement is a whole other blog on why pre-tax 401k deductions are not the best move you can make. Stay tuned.

Too many want too much from those who run the printing presses and whose livelihood depends upon getting re-elected. What would you do if you were in that position? Do you have the character required to say no to all the hands that are out wanting this favor or that? How strong are your ethics? I believe it was D.L. Moody that said something like this “Do right do right till the stars fall from the sky do right” good character is shown when you do what it is right even when no one is looking. Is that the nature of your character? If not then I’d venture a guess that you would crank up the presses just like the current wielders of the printing press switch are instead of making the tough choices required to get America out of this current financial mess.

But I digress- I say the mortgage interest deduction is peanuts in the grand scheme of things but you have to start somewhere.

The Benefits of Whole vs Term Life Insurance

Mortgage Protection Life Insurance is a Term Life Insurance policy that that has special riders that provide for your mortgage payment to be protected if you become disabled or unemployed. Life Insurance, in particular whole or permanent life is the best investment available for the average individual that would like to leave a legacy to their heirs. In the U.S. Life insurance does not go through probate, is not taxed and your heirs have access to their “inheritance” within a few weeks not months or years. In addition whole life builds a cash value that you can access in emergencies or use it like a retirement plan where you withdraw a set amount monthly or annually just like a pension if you start your policy at a young enough age or infuse it with extra cash being careful not to exceed the 7 pay limit. The illustration that you get when purchasing your policy should indicate what that amount is. If it does not – ask for it! The great thing about whole life is your premium payment never goes up no matter how old you get. While it costs more then Term Life initially over time Term insurance premiums become cost prohibitive and you have nothing to show for them. While whole life premiums stay the same for life. Hence the term “whole life”.

Term Insurance is pure profit to the carrier as the majority of term policies are never paid out. Most are cancelled due to the increasing premium costs long before the policy owner dies. Term Life has it’s uses for protecting your home, short term debt obligations to save you family from financial ruin. However, unless you die young it not very cost effective in the long term.

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