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The Fiscal Cliff is Coming – Are You Protected?

The Fiscal CliffI’m sure by now that you’ve all heard about the coming fiscal cliff. More than likely, you’re getting tired of hearing about the dreaded “fiscal cliff” and all the doomsday scenarios being played out in the media. Is it all a bunch of overblown media hype or is it cause for concern? Should you wait and see what happens or should you take steps now to protect your retirement assets?

First of all, the fiscal cliff, or taxmageddon as some are calling it, is a very real threat to your savings, your retirement accounts, your 401Ks, and for those relying on dividends as part of their incomes. The effects of the Budget Control Act of 2011 are set to go into effect after December 31, 2012 and higher taxes will be part of the results if the lame duck Congress fails to reach an agreement prior to the end of the year.

2013 Tax Rates

The Bush era tax cuts are set to expire on December 31, 2012 and revert back to the Clinton era tax rates. According to Forbes, the 2012 tax rates versus the 2013 tax rates will look like this.

Scenario 1: Tax cuts under the extension of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,950 $0 to $17,900 $0 to $12,750
15% $8,950 to $36,250 $17,900 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 and up $398,350 and up $398,350 and up

Scenario 2: Tax brackets under the expiration of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
15% $0 to $36,250 $0 to $60,550 $0 to $48,600
28% $36,250 to $87,850 $60,550 to $146,400 $48,600 to $125,450
31% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
36% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
39.60% $398,350 and up $398,350 and up $398,350 and up

It’s not a very pretty picture for current wage earners, but what about retirees or those nearing retirement? For those relying on dividend income, the fiscal cliff is coming for you too.

Dividend Tax Increase

Taxmageddon

If you rely on dividends as part of your income or retirement plan, buckle up because the current tax rate of 15% on dividends could rise to as much as 39.6% next year. Major companies including Wal-Mart Stores Inc., Costco Wholesale Corp., Dillard’s Inc., and Las Vegas Sands Corp. have all announced “special” dividend payouts to investors this year in order to get ahead of the expected tax increase on dividends. While that great news for investors this year, what will they do in coming years?

Capital Gains Tax Increase

Don't throw your money over the cliffThose relying on capital gains as part of their income will feel the pinch as well with capital gains taxes expected to jump from 15% to 20%. Rick Kahler of Financial Awakenings suggests taking profits and dividends in 2012 to avoid the higher tax rates. This is sound advice except for one major problem – taking profits and dividends this year is a short term solution and will do nothing to protect your assets in the future.

Invest in a Fixed Index Annuity to Protect Your Assets from the Fiscal Cliff

A lesser known solution for safeguarding your retirement savings is in fixed index annuities. An annuity is an insurance product that pays out income and is a popular choice for those that desire a steady income stream during retirement.

Unlike 401Ks and IRAs, you can make unlimited contributions to your annuity and the growth is tax-deferred. Regarding the fiscal cliff, one of the most attractive features of a fixed index annuity is that your gains are locked in and your principal is 100% protected against stock market losses.

In 2009, we witnessed the devastating impact the stock market had on 401K retirement plans. If you were one of the millions affected by the 2009 market crash, you know full well that the stock market is no place to turn in times of crisis.

Safe Money Talk Radio co-host Matt Redding had this to say about the market crash of 2009 and the current fiscal cliff crisis.

“2009 was a tragedy for individuals with 401K plans invested in the stock market. The current fiscal cliff the country now faces has the potential to be much, much worse. Fortunately, investors have learned from past lessons and have made the wise choice to move some of their retirement savings into annuities. Despite the stock market rollercoaster over the last eleven years, our annuity clients have not lost a dime of principal or any gains their annuities have made. It only makes sense to protect yourself in today’s economic climate.”

On MarketWatch.com, Robert Powell had this to say about fixed index annuities.

“In a world where preretirees and retirees are struggling to preserve their principal while earning a decent return, the perfect product might seem to be what’s called a fixed index annuity, or FIA. An index annuity is a fixed annuity, which means that principal and credited interest are protected from market risk…”

The Fiscal AbyssRight now is the time to protect your hard earned retirement savings; December 31st is right around the corner. Before you make a financial decision including purchasing an annuity, I strongly recommend that you consult with a seasoned and trustworthy retirement income specialist. The decisions you make this month may mean the difference between finding yourself in the wreckage at the bottom of the fiscal cliff or relaxing on your retirement oasis.

Cathy DeWitt Dunn~ by Cathy DeWitt Dunn – President
DeWitt and Dunn, LLC

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