It’s a little overwhelming. During Clinton/Gore, things were going so well here and abroad, for the most part, that the other side had to make up stuff to be outraged about, or else dwell on nightmares like the 15 minutes President Clinton may or may not have inadvertently delayed air traffic at LAX while he got an expensive haircut. International news for a week. Here, now, we’re bankrupting states and cities, laying the foundation to dismantle fundamental social programs and lay trillions of dollars in new debt on the shoulders of our children, failing to protect our nuclear plants, eroding the separation of church and state – little stuff like that – and it all comes so fast and furious, none of it gets any traction before the next thing.
If you can find the time, here are two great columns to read and forward, one by Robert Steinback in the Miami Herald (although I disagree with his characterization of today’s stock as ‘soft’), the other, in case you missed it, by Paul Krugman. If you’re unwilling to register with the New York Times (but why? – no, wait, don’t tell me), read it here instead (click ‘Columns’ and then May 27).
Now, I owe you a ton of stuff – which may be 1999 pounds more than you wanted this morning – so I promise to post many of your very good comments in the next couple of days. But for now:
THE NEW TAX BILL AND YOUR RETIREMENT PLAN
Erik Larson: ‘Decreasing the dividend and capital gains tax rates pushes a greater tax burden on those who have been saving for retirement in tax-deferred retirement plans – e.g., 401(k), 403(b). Remember, these are taxed as ordinary income. You can easily put together a spreadsheet to see the various break-even points and it seems an investor who does not realize many capital gains along the way (say, an index fund or buy-and-hold investor) would come out ahead over most scenarios.’
☞ Yes. The three big reasons to use a tax-deferred plan now are: (1) Disciplined saving – retirement plans help you keep the money separate, with penalties for early withdrawal, so you’re less likely to raid them. (2) The tax code could be notched back up – indeed, this ‘little bitty’ $320 billion tax cut that everyone expects to be closer to a $1 trillion over the next decade is written just that way. Many of the tax breaks are set to phase out if not renewed. (3) If your employer provides a ‘match,’ that’s free money.
Still, the case for skipping the tax shelter of a traditional retirement plan is definitely stronger now. Why turn what could be lightly taxed capital gains and dividends into heavily taxed ordinary income? Why give up ready access to your own money? Why incur custodial and management fees? Even the big incentive – lowering your taxable income by the amount of the contribution – becomes less enticing because your tax bracket is now lower.
My own bottom line: If you’re in a plan with an employee match – or in a Roth IRA, withdrawals from which are never taxed – stick with it. Otherwise, I guess it makes sense to think twice. Especially if the plan you’re in only gives you investment choices that siphon off significant management fees
Nick Drury: ‘I suggest that individual states solve their budget deficits by taxing dividends received by their residents at an amount equal to the amount that they were cut by President Bush and the Republican Congress. In this way, no one would pay more taxes than they had in the past and states would not have to cut spending on schools or other essential programs.’
☞ The problem, beyond the politics, is that if some states did this and some did not, wealthy folks would move to the states that did not, hurting the states that did all the more. It would only work if all the states did it more or less equally – and you can be sure Governors like Jeb Bush would sooner close every school in Florida than reimpose a tax on the wealthy.
Tomorrow or soon: Your Feedback – Paying Your Bills, Foley, Jessica Lynch, Etc.