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The Other Enemy of 401(k) Plans (and your retirement)
What government gives with one hand, it takes back with the other. I’m serious. We experience the taxation of Social Security benefits as a tax on money withdrawn from our retirement plans. Many middle-income retirees now are paying taxes on those withdrawals at a 28.25 percent rate. That’s higher than the 15 percent top rate they paid throughout their working careers. To put that 28.25 percent rate in perspective, 28 percent is the rate couples will pay on taxable incomes over $151,201 this year. (For singles, the figure is $90,751.) Retirees with Social Security benefits can pay 28.25 percent on withdrawals from their retirement plans. This can happen when income is well below $100,000….
But the tax provision is unusual. It is one of the few provisions in our tax code that are not indexed to inflation. As a consequence, an obscure tax that hit a handful of affluent retirees in 1984 today hits 30 percent of all retirees. And since the law still isn’t indexed, it will hit even more of the next generation. That’s why I called it “the Tax Torpedo.“ Read more…