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Retirement and the ‘fiscal cliff’

By Barbara Whelehan · Bankrate.com
Friday, December 28, 2012
Posted: 3 pm ET

Despite possible progress at this writing, it looks as if nationally we still could take a leap off the "fiscal cliff" like lemmings, thanks to a lack of leadership in the political arena. As fellow blogger Kay Bell points out in her post, Fiscal cliff political follies, it appears the folks in Congress are more concerned about the 2014 election than about the fiscal crisis our nation faces.

I've had it with all the media attention about the fiscal cliff, but I couldn't resist reading about what it means for retirement savings policy in a column called "Cliff Dwelling" in the current issue of Plansponsor Magazine.

Higher tax rates will provide a good incentive for retirement savings, according to Michael Barry, president of the Plan Advisory Services Group, who penned the column. "The higher the tax rate, the greater the tax benefit from saving in tax-advantaged vehicles, for example, a 401(k) plan," he writes. "So, no matter how much we may, or may not, personally oppose higher rates, they are good news for retirement savings."

He makes the same case for tax rates on capital gains and dividends, currently 15 percent for most taxpayers. That rate is lower than the top rate for ordinary income, currently 35 percent and soon going up to 39.6 percent if we wake up Jan. 1 with no resolution on this crisis.

Because distributions from a retirement workplace plan are taxed at ordinary rates, that makes it a less attractive place to put money from a tax standpoint than investments that are taxed at capital gains rates. But if the capital gains rate goes up, "then tax-qualified retirement savings will become relatively more attractive," according to Barry.

All this may be true for someone who lets tax policy dictate their financial moves. But I don't think most people think in these terms. When it comes to retirement planning, all I'm concerned about is saving as much money as I can so that I don't run out during retirement.

What about you? Does tax policy dictate your financial decisions?

And what's your take on this fiscal cliff crisis? Do you think we're headed for an abyss?

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Follow me on Twitter: BWhelehan.

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