The Perils of Pensions

Published on 8:10 am by in Blog


To most CPA’s and novice investors, the pension is the greatest thing since sliced bread. Who wouldn’t be attracted to a tax deduction and tax-deferred growth? Even the “benevolent” government of ours has jumped in to help by introducing EGTRRA which enhanced the limits on most qualified plans and added catch-up provisions. It’s no surprise that these catch-ups apply only to those over age 50. “Why” do you ask would the government give up additional opportunity for tax revenue when Social Security is bust and Medicare and Medicaid is five times worse? The answer is in the history books.

We’ve been blessed in recent years with historically low tax and interest rates. Looking back to the early 1900’s however (see attached chart), the top rates have been as high at 50-70% and many of you have probably experienced mortgage rates of two to three times what we have today. With the peak of Boomers’ retirement just around the corner, Democrats threatening control at all levels and the deep financial problems addressed above coming about, odds are we’re in for some tax hikes.

The question then should be, “Why would you ask for a deduction in a lower tax-bracket only to pull it out in a higher one?” The government hopes you will. The reason they’ve given the catch-up provisions to people over 50 and older is so they can get a return on their investment in a short period of time. They want you to pay tax on the “harvest” and not the small amount of “seed” you plant.

If you’ve seen our bound presentation that compare over-funded life insurance to mutual funds and pensions, you can understand why insurance wins so handily over the other options. Keep in mind that these comparisons assume NO tax increase. If our clients are putting a majority of their savings into qualified plans, we have an obligation to let them know the risks and alternatives associated with it.

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