Congress has been getting better at hiding tax increases on the middle class the past decade or so. The Secure Act, and to a lesser extent Secure Act 2.0, are prime examples of how Congress saddled the middle class with higher taxes under the guise of providing better opportunities in retirement planning.
When people have infinite banking explained to them for the first time it seems like a magical and risk-free way to grow wealth. The idea of replacing the hated bank with borrowing from yourself makes so much more sense. But it does require replacing the “hated” bank for the “hated” insurance company.
Once you reach 50 retirement planning takes on a new level of seriousness. Avoiding a setback is more important than ever as there is less time to recover.
There are tools available to help you build for retirement and plan for life in retirement. You can reduce taxes and increase income with these tools. Anybody can use these tools at any age; for those 50 and older these tools have added benefits reducing taxes and increasing retirement income.
When it comes to the blogs and other tracts providing information on building wealth, frugality carries most of the weight. And it makes sense. The greater the difference of income over spending is a strong determinant of the level of wealth an individual will achieve during their lifetime as compared to their income level.
As important as frugality is, spending is even more important, even if it doesn’t garner the required column inches the matter deserves. Spending less than you earn is the seed money for investments and without investments it is impossible to build significant wealth.
As an accountant I see people from all spectrums of income. Frugality, even hyper-frugality, is the hallmark of those with modest levels of wealth. Even the lowest income earners can amass a half million or more in a working career when frugality is taken to religious levels, with the excess invested in equities like index funds.
Mid-levels of income also do well with only the single tool of frugality. As their wealth grows they sometimes seek out professionals to help them. These clients tend to want short consulting sessions once a year with a review at tax time.
Then come the serious achievers. These people sometimes have modest incomes, sometimes large incomes. Regardless their income level, these people smack it out of the park. Their level of wealth is well beyond what would be expected for their income level or level of frugality (the excess of income above spending).
Super-achievers in wealth building focus on spending more than frugality. They know spending is more important. And they know most spending drains their energy and wealth while proper spending can actually make them richer!
Two major tax increases are about to crush middle class Americans. The first tax increase has already been passed into law and will soon go into effect. The second massive tax increase is more sinister. The amount of the increase has yet to be determined, but we can get a good idea how much will be pried from your wallet if you don’t take steps to defend your wealth.
The Tax Cuts and Jobs Act of 2017 (TCJA) lowered taxes for the vast majority of individuals and regular corporations. There were a few losers. Taxpayers with high state and local taxes (SALT) found their deductions declining faster than rates fell causing a sharp pain behind their left eye on April 15th.
Other taxpayers feeling the pain of a tax increase include truckers, sales people, artists and others with work related expenses. Unreimbursed employee business expenses were eliminated. Truckers (and others) no longer can deduct their work expenses. The TCJA hurt a large number of hard working Americans. Even the mortgage interest deduction was slightly curtailed. Not as many felt that sting, but all the same, the TCJA was uneven in reducing taxpayer liabilities.
Regular corporations saw the biggest benefit. Corporations now have a flat 21% tax rate. Except for corporations with less than $50,000 in profits, this was a tax cut.
In 1968 Nick Murray had to sell investments the hard way. He met most clients in their home. The tool of choice was the mutual fund. Most people he sat with were hard working people, but unsophisticated investors. Fee-based advisors were rare in those days for the small accounts families had. Fees were high and people were risk adverse. To top it off, the market was having bouts of volatility, suffering a noticeable decline even to those who didn’t follow the market on a regular basis.
It was in this environment Nick Murray had to convince his clients and potential clients the best course of action for them. Investing in mutual funds came at a steep cost. Loads (aka sales fees) were as high as 8.75%. 91.25% of your money went to work right out of the gate trying to get back to the even water mark.
Young families had to consider equities for at least a portion of their portfolio if they were ever to have enough money for a comfortable retirement, and Nick Murray knew it. The high fees were one issue; the market another. The question was always the same:
“Do you think the market will go up?”
Some tax strategies are so common most people know about them. Why is it then almost nobody is using the strategy?
A large part of my tax practice is consulting. There isn’t much room for more tax preparation clients. However, I love helping people reduce their taxes, so I spend considerable time outside tax season working with good people designing strategies tailored to their personal needs.
The past several months I have repeated the tax break in question countless times. It is missed nearly 100% of the time. Of my regular tax clients, the ones using this strategy did so at my encouragement.
It started earlier this year when I published this post on traditional retirement accounts and how they have an implied interest rate on the tax savings. Before that I published this post because I was seeing consulting clients who had rather large retirement accounts at a young age.
It is to be expected in a community of savers and investors to have large retirement accounts at an early age. My lament was about how big those accounts were going to get and the loss of control over tax issues in the future as a result.