When Common Sense Fails

How will you react if 100% of your retirement plan distributions go to tax?

It was in 1974 that the IRA was born and we were assured by the government that by putting our money into a retirement plan today, we could reduce our current taxes and pay a lower rate in retirement. Life was simpler then. It was easy to project a lower tax rate because the top tax rates were in excess of 70% and Social Security benefits were not subject to income taxes. Basic common sense told us to put our hard-earned money into tax deferred retirement plans assuming the future tax rate would be lower.

This message of tax deferral has never changed. Yet after the Tax Simplification Act of 1986, the top tax brackets were less than one-half of the 1974 rate. With the lower tax brackets, 85% of taxpayers fall in the 15% tax bracket or lower. This means that taxpayers contributed significant portions of funds now in retirement plans while they were in or below the 15% tax bracket. What are the odds that their tax rate will be less than 15% in retirement?

Much has changed in the tax code since 1974. A “provisional income test” now determines the portion of what once was a tax-free social security benefit that is now subject to income taxes. Because of this test, income sources such as an IRA distribution could increase the taxable portion of social security in addition to the tax due to the IRA distribution by up to 85%...

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