For the past decade I have talked with clients every day about a system to distribute wealth for retirement tax-free. This system outlines exactly how to apply the Internal Revenue Code rules to your individual situation and find tax savings for you, which, in many cases, other advisors don't know exist. Look at it this way. While saving for retirement in an IRA account or 401(k) plan may have provided you with tax savings when you made those contributions, there comes a day when the IRS wants you to pay the tax bill. When that time comes, you don't want to be subject to tax-rate risk. Tax-rate risk is the ability that congress has to change the amount of taxes you pay on those distributions. We hear people on TV always promoting a 401(k) or IRA. They say something like, "You are in a higher tax bracket now and you will be in a lower tax bracket in retirement." This just may not be the case, as we will talk about today. For some reason, these same so-called financial experts don't seem to know where taxes have been, what is happening in congress, or what really determines one's tax bracket in retirement.

So the topic of this month's newsletter is to address the question of could taxes go up in the future and could you be in a higher tax bracket in retirement?

Let's start with what the highest marginal tax bracket has been? According to the IRS, in the mid 40s the highest marginal tax bracket was an astounding 94%. As recently as the 70s it was as high as 70%. Currently we are at historic lows. So the question is, what could cause taxes to go up?

Well you probably guessed it, the need for more revenue. Government expenses were 300 billion more then their revenues according to the 2006 reports from 2005. The number one cost to the government is Social Security and Medicare, taking up 37% of the federal expenditures. National Defense, Veterans, and Foreign Affairs come in second at 24.5%. Of course, other things like wars, hurricanes, and terrorism don't help either. Guess what they report as the number one income source for the government? Yup you guessed it, individual income tax, making up 38% of their revenue. Coming in second is social insurance tax, making up 32%. This is where it gets scary. David Walker and Ben Bernanki both agree 100% on this topic. David Walker is the person who audits the government's books and serves as the investigative arm of the U.S. Congress. He is also the government's chief accountant. He said in his testimony before the budget committee of the U.S. Senate, this year:

"Because this baby boomer generation is retiring and drawing on social security, Medicare, and Medicaid, that the government will either have to cut federal spending by 60% or raise federal taxes to 2 times today's level."

In the 2003 Tax Act they have already set in motion for all of the tax brackets to go up starting in 2011. What that means is you will be paying higher taxes.

We already know where taxes have been in the past, which tells us where they could go in the future. So when these so-called financial experts say you will be in a lower tax bracket, they must not be looking at the fact that tax rates are going up. The only other area they could be looking at would be your income in retirement. Your income is what determines what tax bracket you are in. So, for argument's sake, let's say taxes stay the same. You still may be in a higher tax bracket in retirement, even if you have less income. The reason why is that most people lose tax deduction in retirement. The biggest deductions, such as your mortgage interest, children, and retirement contributions are no longer there to deduct. This can cause your taxes to go up.

If your income in retirement is lower than it is now, and you saved money for say 20, 30, 40 years, what kind of job did you do saving for retirement? Or think about it this way, how many people want to retire to a significantly reduced standard of living? When you retire don't you want to retire to at least the same standard of living you are used to? Some even want a better standard of living. They don't want to sit around the house. They want to travel or go see grandchildren. Is all that stuff free? In addition you may have other expenses such as health insurance, or medical expenses. So, you see, you lose some expenses like mortgage payments but other expenses take their place. Some may say "Hey, I have great health coverage through my employer. It's part of my retirement plan." If that is you, you should go talk to some GM and FORD employees and see what is happening to their health coverage. It's being changed on them whether they like it or not. Don't plan on things that are not guaranteed.

It gets worse. Did you know that with 401(k)s, IRAs, and other qualified plans, the IRS will tell you how much money you have to take out at age 70 ½? They call this minimum distribution requirements. If you don't take out the amount they told you to, they will penalize you 50%. If you withdraw too much money in retirement, your social security will get taxed. Yes, the IRS wants to tax your social security, as noted earlier. This is a big part of their revenue. Don't worry though, you don't have to pay tax on your social security if you've done everything right.

Fortunately, there are congressionally approved methods for receiving retirement income tax-free. This is known as asset shifting or distribution planning. This is where I spend most of my time. It is not just how you invest that is important but where you invest. When we get together I will show you some creative ideas to take what you are currently doing and show you how you can either reduce the taxes you will pay in retirement or show you how you could possibly get your entire retirement tax-free, including your social security. In summary, this means you will take advantage of today's low taxes, eliminate what is called tax-rate risk, eliminate the minimum distribution problem, and receive your social security 100% tax-free.

If you or someone you know needs some help managing retirement assets, setting up a retirement savings plan, or have life insurance needs, just give me a call at 801-545-0696.

Respectfully,