Exploring the Tax Code: You Have Options

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Published February 22, 2012

When the 16th Amendment instituting the federal income tax was under debate a century ago, the proponents assured Americans that the tax on income would be small and non-intrusive. The amendment was ratified in 1913. Representative Cordell Hull of Tennessee, who drafted the first income tax, promised that it would only apply to the Carnegies, the Vanderbilts, the Rockefellers and the Morgans with their billions of dollars of wealth. The original 1040 form in 1914 was so compact, the New York Times printed it on the front page. There were only 4 instructive forms. Today there are 4000. The proponents of the income tax urged that, at least, there should be a provision to the 16th Amendment capping the tax rate at no more than 10 percent. Advocates claimed this was unnecessary because the tax rate would never exceed 10 percent. By 1918, when the government wanted money to fight World War I, the top tax rate was 77 percent.

Let us fast forward to the year 2035. You have just turned 70 years old. You have been contributing to your 401K retirement plan since 2000, when you started thinking seriously about your financial future. Your account has grown to a sizeable sum, and you’ve reached the age of eligibility for Social Security benefits. You will only be able to collect about half of what your baby boomer parents did because of the shortage in Social Security, but you are happy just to receive some of it--even though you have been paying into it since you first started working.

Now comes your wake-up call. All of your working life, you have been told that you would be in a much lower tax bracket when you started withdrawing from your account upon retirement. You now find out that you were in a much lower tax bracket during your accumulation (working) years because of all of the deductions from raising your children, paying your mortgage and, of course, contributing to your 401K plan. The company that you worked for eliminated the medical benefits for retirees several years ago, so you will also have to pay for the escalating expense of health care for yourself and your spouse. Tax increases over the years to pay for out-of-control national spending and government bailouts added to the excessive entitlement programs, and state and local taxes and the cost for goods and services have pushed all tax brackets higher. You find your tax bracket may or may not be lower than when you stopped working, but it is much higher than when you started contributing to your 401K plan. The problem is that now you have to pay the bill for the deduction for every dollar that you contributed, plus every dollar that you earned in interest over those thirty-five years.

At this point, when you retire, high taxes and huge expenses are draining the cash that you have saved over the years to live comfortably, making your planned retirement life only a dream. Wouldn’t it be helpful if there were a financial product that could protect your family, allow tax-deferred accumulation, create potentially tax-free income, and only participate in a portion of the upside of the market–never in the downside?  Well, this option exists in the form of a properly structured and funded indexed life insurance contract. You do have options that you owe it to yourself to explore. . You can view the IRS ruling at www.irs.goc/irb2005-06_IRB/ar12.html.


You can read more from Steve Bishop at http://www.taxfree4life.net/

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