The Tax on Your Retirement Savings
A special income tax is hidden among the instructions on your Federal form 1040. If you are younger than retirement age, you would have no reason to notice it at all. It is found on line 20 of the long Federal tax form, identified as “Social Security benefits.”
You don’t get Social Security benefits yet? Learn about this tax now, before it hits you - hard. Every dollar you put away into tax-sheltered savings (except Roth IRA contributions) will one day pay this tax. This tax is a classic of political stealth and deception.
Line 20 does not tax Social Security benefits, since these benefits are not taxable. Instead, this special tax falls on other income you receive after you begin receiving Social Security benefits. This tax changes your gross income, and that is what changes your tax rate when you receive money from a retirement account.
The tax increase is not small. It jumps up your marginal tax rate by 50 percent. So if you are in the 15 percent tax bracket, your marginal tax rate becomes 22.5 percent. And if you are already in the 25 percent tax bracket, it can raise your marginal tax rate by 85 percent: instead of paying 25 percent tax to the IRS for what you get from an IRA or 401(k) plan, you will pay 46.25 percent on this money.
Imagine two twins, both with identical jobs and incomes. But let’s say one twin saves lots of money and the second twin spends everything. Assume that each twin receives identical Social Security benefits, but the first also receives distributions from a 401(k) plan he contributed to, and never paid taxes for, his entire life. Taxes will be due when the retirement distributions begin. If the second twin keeps on working, because he has no savings, his marginal tax rate will be perhaps 15 percent. But the retirement distributions from the first twin will have a tax rate of 22.5 percent on every dollar. If the twins were in the 25 percent tax bracket, the frugal, prudent twin would pay 46.25 percent on every dollar.
Only professional income tax preparers, and members of Congress, are aware of how this tax works (only a few Congressional staff understand it). For a chilling look at how it is calculated, check out the instructions and the worksheets that come along with Line 20. You’ll find a masterpiece of confusion.
This tax was first passed in 1983. In those days, Social Security was headed for bankruptcy by 1990, so a tax increase was the solution Senator Bob Dole and Alan Greenspan, not yet chairman of the Federal Reserve, decided to give us. They knew it would be political dynamite to change anything about Social Security, so they crafted this sneaky idea. Social Security would not be touched! Instead, other income you get in retirement would be taxed at a higher rate.
To delay any visible effects of this tax for at least 10 years, a large $25,000 exemption was granted ($32,000 for married couples filing joint tax returns). But the exemption was not indexed for inflation. Congress did that on purpose, so eventually everyone would come under this special tax - but not until the culprit members of Congress had retired. A quarter century has passed and this tax now affects the savings of almost every retired American. In a few years all but the poorest retired people will pay this extra tax.
Last year, Congress passed amendments to the 401(k) law to enroll all American workers automatically, and a special retirement savings credit, form 8880, has been part of the tax code for the past four years. It is as if Congress knows raising taxes directly is unpopular, so they design schemes to collect more revenue indirectly from people’s tax-sheltered retirement savings. Young people who are encouraged to save for retirement are being suckered (only the Roth IRA escapes this tax).
Is your plan for retirement to give the federal tax collector half of what you’ve saved? The only good news in this story is that California state income tax does not have this higher rate feature. The tax systems in Arizona and about 40 other States do include this extra tax, automatically incorporating it in your “adjusted gross income.”
The lesson to be learned from this sneaky tax on retirement savings should be to toss out the entire tax code and replace it with a federal system of simple, flat-rate State taxes (see my book on this site). It is treacherously undemocratic for any tax system to be as incomprehensible as the one in the United States today.
This entry was posted on Monday, March 19th, 2007 at 10:06 am and is filed under Editorial Page. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site
Copied with permission from Joe Cobb. Go to www.joecobb.com for more informational topics. Thank you
10 comments:
Hey guys good luck at the joint council!
Hey rudy and Joe great job on your speech at the joint council today,You guys had a standing ovation,It's a good feeling "right"!!
Ray,paul,sal,xoxo,That was a great presentation at the joint council,you guys are future natrual leaders for the Teamsters,thank you for the blogsite.
Somebody has to tell this larry to read the top part of this website,its an educational program,forum,and interest of a union formation,not an explaination of why they need a union.Because most of you guys are knowledgeble about the functions of being a membeber of a union,having a union in a work place gives you a major leverage,and rights to be able to speak out your opinions without any repercussion action against you.Also to formulate a contract,to state definitely and clearify your rights.My name is Carlos Castaneda I belong to a machinist union in spain and my union has jurisdiction all over europes continent, and with a membership of 2.3 million memembers.That is a strong solidarity as group that produces and shared interests and goals,keep on fighting for your rights and stay strong and focus.Hey pepe you are doing the right thing for your fellowship coworkers I am proud of you,also heard you were in Paris France in December,you should have visit us cousin everybody here would have been surprise to see you.Islas canarias is'nt far from france anyway next time cuz,one more thing I have 4 freinds here that work for federal express and gave them your website.p.s memebers and commitee from the u.s.a don't give pepe a hard time about his nickname he hates his nickname sorry Joe Nuno Thats for not stopping by,love you and tell the family hi for me.
some harassment highlights from James Meyer are:
1) One Employee gets in the captive audience union no employee meeting and James bad mouths the union the employee had family who works in a union company for over 20 years and becomes offended by the bad mouth union no talk. He then tells James,"The union ain't all bad." and after the meeting James follows the employee on the loading dock in a threatening manner and runs up to the breakout the employee is in and said,"Don't stir up trouble talking union around here." The employee then already offended feels an even deeper hurt and harassment from James.
2) The second Employee worked on and off in the office for 7 years and because of favortism and a union yes stance he found his job replaced by someone else under the guidance of James Meyer. The employee felt harassed and victimized that he had worked in the department for so long and not been written up for wrongdoing, but because James didn't like him be it personal reasons or a union yes stance he was relegated to the dock and demoted.
3) The third employee who was harassed worked in the office and requested benefits because he worked 40 hours per week and his girlfriend was expecting. HR denied these benefits and the employee was sent back to work the dock because part timers can only get 32 hours per week not 40 at Fedex Freight. The employee eventually went supplemental and found a day job better off for his family.
you know whats been bothering me lately is the forklifts at whittier leaking oil and being left all over the dock all unsafe working conditions osha needs to be called
call osha 1-800-475-4020
FedEx Kinkos sells itself to the consumer in part as a place to be able to ship packages.
The catch is that they only accept packages that are shipped Express rate. That is not the bad news. The bad news is that they don't notify companies that ship of this policy nor are their drivers even aware of this policy. They gladly accept your money and then refuse the shipment at the destination. (their computers could pick this up if they cared about the customer)
The gentleman (yes I say that in jest) that manages the Yuma store absolutly refused to make an exception and accept the package despite the fact that they keep this poicy secret and that I have been doing business for 30 years with this company. So much for cutomer loyalty from FedEx!
If all of this is not bad enough try to get ahold of a manger at a higher level... you go into voice mail and if you are lucky you may hear back from them if a few days.
Hope that you never end up in my situation, on the road expecting 5 critical shipments only to find that FedEx is going to refuse all of them! Going to cost me weeks in time and lots of money in duplicate shipping costs!
I just suggest to those reading this to vote with your feet and not use FedEx. They don't seem to know who pays their saleries.
Joe
Fort Myers, Florida
United States Minor Outlying Islands
Hey sonny I don't know who you are,I'll ask you once don't threat on this site,don't bring familys in,I think for that kind of language you might wanna blog trucking boards.com (see-ya)
What Fees are Associated with My Investment Choices in a 401(k) Plan?
Apart from fees charged for administration of the plan itself, there are three basic types of fees that may be charged in connection with investment alternatives in a 401(k) plan. These fees, which can be referred to by different terms, include:
1.
Sales charges (also known as loads or commissions). These are basically transaction costs for the buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.
Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.
Other fees. This category covers services, such as record keeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.
In addition, there are some fees that are unique to specific types of investments. Following are brief descriptions of some of the more common investments offered under 401(k) plans and explanations of some of the different terminology or unique fees associated with them.
Some Common Investments And Related Fees
1. Most investments offered under 401(k) plans today pool the money of a large number of individual investors. Pooling money makes it possible for individual participants to diversify investments, to benefit from economies of scale and to lower their transaction costs. These funds may invest in stocks, bonds, real estate and other investments. Larger plans, by virtue of their size, are more likely to pool investments on their own -- for example, by using a separate account held with a financial institution. Smaller plans generally invest in commingled pooled investment vehicles offered by financial institutions, such as banks, insurance companies or mutual funds. Generally, investment-related fees, usually charged as a percentage of assets invested, are paid by the participant.
Mutual Funds - Mutual funds pool and invest the money of many people. Each investor owns shares in the mutual fund that represent a part of the mutual fund’s holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a specific investment policy. In addition to investment management and administration fees, you may find these fees:
Some mutual funds assess sales charges (see above for a discussion of sales charges). These charges may be paid when you invest in a fund (known as a front-end load) or when you sell shares (known as a back-end load, deferred sales charge or redemption fee). A front-end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some which decrease and eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if you decide to sell a fund share when a back-end load is in effect, you will be charged the load).
Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers to a 401(k) plan pursuant to a bundled services arrangement. They are usually between 0.25 percent and 1.00 percent of assets annually.
Some mutual funds may be advertised as “no load” funds. This can mean that there is no front- or back-end load. However, there may be a small 12b-1 fee.
Collective Investment Funds - A collective investment fund is a trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets and your investment in the fund is $10,000, you have a 0.1 percent interest in the fund. Like mutual funds, collective investment funds may have different investment objectives. There are no front- or back-end fees associated with a collective investment fund, but there are investment management and administrative fees.
Variable Annuities - Insurance companies frequently offer a range of investment alternatives for 401(k) plans through a group variable annuity contract between an insurance company and an employer on behalf of a plan. The variable annuity contract “wraps” around investment alternatives, often a number of mutual funds. Participants select from among the investment alternatives offered, and the returns to their individual accounts vary with their choice of investments. Variable annuities also include one or more insurance elements, which are not present in other investment alternatives. Generally, these elements include an annuity feature, interest and expense guarantees and any death benefit provided during the term of the contract. In addition to investment management fees and administration fees, you may find these fees:
Insurance-related charges are associated with investment alternatives that include an insurance component. They include items such as sales expenses, mortality risk charges and the cost of issuing and administering contracts.
Surrender and transfer charges are fees an insurance company may charge when an employer terminates a contract (in other words, withdraws the plan’s investment) before the term of the contract expires or if you withdraw an amount from the contract. This fee may be imposed if these events occur before the expiration of a stated period and commonly decrease and disappear over time. It is similar to an early withdrawal penalty on a bank certificate of deposit or to a back-end load or redemption fee charged by some mutual funds.
Pooled Guaranteed Investment Contract (GIC) Funds - A common fixed income investment option, a pooled GIC fund generally includes a number of contracts issued by an insurance company or bank paying an interest rate that blends the fixed interest rates of each of the GICs included in the pool. There are investment management and administrative fees associated with the pooled GIC fund.
While the investments described above are common, 401(k) plans also may offer other investments which are not described here (such as employer securities).
Where Can I Get Information about the Fees and Expenses Charged to My 401(k) Plan Account?
If you have questions about the fees and expenses charged to your 401(k) plan, contact your plan administrator, who should be able to assist you with the following documents:
If your plan permits you to direct the investment of assets in your account, the plan administrator should provide you with copies of documents describing investment management and other fees associated with each of the investment alternatives available to you (i.e., a prospectus). The plan administrator should also provide a description of any transaction fees and expenses that will be charged against your account balance in connection with the investments you direct.
Your account statement will show the total assets in your account, how they are invested and any increases (or decreases) in your investments during the period covered by the statement. It may also show administrative expenses charged to your account. Account statements will be provided once a year upon request, unless your plan document provides otherwise.
Your 401(k) plan’s summary plan description (SPD) will tell you what the plan provides and how it operates. It may tell you if administrative expenses are paid by your plan, rather than by your employer, and how those expenses are allocated among plan participants. A copy of the SPD is furnished to participants when they join a plan and every 5 years if there are material modifications or every 10 years if there is no modification.
The plan’s annual report (Form 5500 series) contains information regarding the plan’s assets, liabilities, income and expenses and shows the aggregate administrative fees and other expenses paid by the plan. However, it will not show expenses deducted from investment results or fees and expenses paid by your individual account. Fees paid by your employer also will not be shown. You may examine the annual report for free or request a copy from the plan administrator (for which there may be a charge). In general, the summary annual report, which summarizes the annual report information, is distributed each year.
In addition, you may want to consult the business section of major daily newspapers, business and financial publications, rating services, the business librarian at the public library or the Internet (see the list of helpful Websites listed at the back of this booklet). These sources will provide information and help you compare the performance and expenses of your investment options with other investments outside of your 401(k) plan.
If, after doing your own analysis, you have questions regarding the rates of return or fees of your plan’s investment options, ask your plan administrator for an explanation.
What Other Factors Might Impact the Fees and Expenses of My 401(k) Plan?
Funds that are “actively managed” (i.e., funds with an investment adviser who continually researches, monitors and actively trades the holdings of the fund to seek a higher return than the market) generally have higher fees. The higher fees are associated with the more active management provided and sales charges from the higher level of trading activity. While actively managed funds seek to provide higher returns than the market, neither active management nor higher fees necessarily guarantee higher returns.
Funds that are “passively managed” generally have lower management fees. Passively managed funds seek to obtain the investment results of an established market index, such as the Standard and Poor’s 500, by duplicating the holdings included in the index. Thus, passively managed funds require little research or trading activity.
If the services and investment alternatives under your plan are offered through a bundled program, then some or all of the costs of plan services may not be separately charged to the plan or to your employer. For example, these costs possibly may be subsidized by the asset-based fees charged on investments. Compare the services received in light of the total fees paid.
Plans with more total assets may be able to lower fees by using special funds or classes of stock in funds, which generally are sold to larger group investors. “Retail” or “brand name” funds, which are also marketed to individual and small group investors, tend to be listed in the newspaper daily and typically charge higher fees. Let your employer know your preference.
Optional features, such as participant loan programs and insurance benefits offered under variable annuity contracts, involve additional costs. Consider whether they have value to you. If not, let your employer know.
Pension plans, such as 401(k) plans, are group plans. Therefore, your employer may not be able to accommodate each employee’s preferences for investment alternatives or additional services.
For additional information regarding the level of fees typically charged to 401(k) plans and 401(k) plan fees and expenses generally, see the Employee Benefits Security Administration’s 1. Study of 401(k) Plan Fees and Expenses.
For more infromation go to www.dol.gov (Department of Labor)
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