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Retirement planning and the deficit

By Jennie L. Phipps ·
Monday, May 9, 2011
Posted: 3 pm ET

Congress is between a rock and a hard place over federal budget deficits, but as of today, it looks like there shortly will be a compromise over raising the debt ceiling. As Washington Post writer Ezra Klein wrote, both sides have a "healthy aversion to unimaginable consequences."

Even if the current debt ceiling crisis is averted, people living in retirement aren't out of the woods. Unless Republicans manage to gain control of the House, Senate and the presidency in 2012 -- an  unlikely scenario -- the 15 percent tax rate on most capital gains and dividends will almost certainly end, says James Delaplane, who spoke today at a retirement income seminar sponsored by Investment News Magazine. Delaplane is a partner in the Washington, D.C., law firm of Davis & Harman LLP and a retirement policy expert.

The demise of low capital gains rates hits anybody who sells stocks they've held a long time. You don't have to be rich to be in that boat. And that's not the only potential change that could affect the retirement planning of modest earners. Delaplane says it's likely that the the Bowles-Simpson deficit reduction commission proposal to cap tax-deferred savings in 401(k) and other defined-contribution plans to the lesser of $20,000 or 20 percent of income annually is likely to be adopted. They would hit people who make more than $100,000, which may sound like a lot of money, but isn't if you live in an expensive part of the country.

Delaplane also believes that the tax-free accumulation of money within annuities and life insurance policies is likely to be on the chopping block. That could affect some very modest-earning retirees.

With a $14 trillion deficit something has to go, but discouraging people from saving for retirement doesn't seem like the smart approach.

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June 28, 2011 at 9:38 pm

It has nothing to do with seniors. It has everything to do with double taxation. Here is an example:

Assume that the tax rate for individuals is 35% and the Tax rate for corporations is 25%. Each earn $1000.

The individual pays $350 in taxes, and the corporation pays $250.

Then the corporation pays the remaining $750 to it's shareholder, in the form of a dividend. The dividend is taxable at 13.3% rate to trigger an additional tax for the individual of $100, thus equalizing the tax income for the government at $350 in both cases.

June 10, 2011 at 1:18 pm

Everyone desires a break. I never got a job from someone who did not have capital to invest. Government is to big, to wasteful, and the longer that Congress is in DC. Then the more money they spend because of all the special interest groups have access to them. If they were required to spend 8 months in their districts then it would be us they would be catering to and not some lobbist.

June 09, 2011 at 4:32 pm

Please get your terms correct. The DEBT is at $14 trillion, not the deficit. The deficit is the amount we overspend each year which is, in turn, added to the debt.

May 09, 2011 at 9:21 pm

I don't really understand the whole concept of why there should be preferential tax rates for different kinds of income. Why is exposing capital to risk in exchange for reward considered more worthwhile than earning wages for work? Why should wages earned be taxed at a higher rate than investment income? Why should dividends or capital gains receive what amounts to preferential treatment?

If the argument is that we don't want to penalize the earnings of retirees, then I think there are better ways to accomplish that goal: change the tax code to favor seniors. But seniors aren't the only recipients of dividends and capital gains, and not everyone who receives that income deserves a break.