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Attack of the 457 Plan Tax Zombies! (Part 1 of 2)

by smeneshi - Aug 20, 2014

Why Are Terrifying Income Tax Issues Lurking for Public Sector Retirees? 


Many of you in the public sector wisely make payroll contributions to your 457 deferred compensation plan to save for retirement.  Another reason why you contribute to a 457 plan is to put off paying federal income taxes until retirement.  While saving away is a smart thing to do, making pre-tax contributions to a 457 plan may give life to the most evil of all creatures – the dreaded tax zombie!

(Are you too busy to read the entire post?  CLICK HERE to listen to me speak about this topic on a recent radio interview).

A lot of government workers think contributing to a 457 deferred comp plan is a good idea because it reduces your income tax rate.  Since income might be lower during retirement years, the idea is 457 plan withdrawals will be taxed at a lower rate.  By avoiding taxes now and paying them later, you might think that you’re getting one over on the tax man.  Not so fast!  During retirement your income tax rate can stay the same or even jump higher than what it was during your working years.

According to Public Retirement Planners, LLC there are three key reasons why so many of you in the public sector are finding out the hard way about the flaw in your deferred compensation tax strategy:

1) A lot of you “retire” at a relatively young age and begin pulling monthly pension payments, but soon after retirement, you may begin working again, start a business or consulting firm.  In the case of married couples, oftentimes the retiree’s spouse is employed or running her own business.  The combined income earned by the two, along with pension payments, could boost the couple into a higher tax bracket.

2) A retiree might decide to start withdrawing money from his 457 plan to cover living expenses or large purchases like a child’s wedding, which adds to taxable income.

3) A lot of you no longer are itemizing deductions and have fewer dependents to claim.  If your mortgage has been paid off, you don’t have interest payment deductions, which reduces the chance for those payments to move you into a lower tax bracket.  Also, if your children are no longer dependents, the ability to benefit from the tax breaks they produced is eliminated.

The combination of 457 plan withdrawals, pension payments, income from a second career or business, and a spouse’s income can lead to an all-out attack of the tax zombies.  This is because the money from all of these sources may result in your post-retirement income being the same or more than your pre-retirement income.  Now, couple this with fewer tax deductions, and the end result is having a tax rate that is the same or higher than your pre-retirement rate.  The tax zombies will be taking a bigger bite of your hard earned savings!

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.comPublic Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

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