Editor’s Note: Dallas Gutierrez has more than three decades in the financial field and is one of only a handful of people capable of helping turn the United States banking system upright in the event of a disaster. A resident of Galveston, she is the general manager of PHP Agencies, a financial marketing service located at Mainland City Centre in Texas City. For more information, contact her at dallasceo54@gmail.com
I have been receiving calls from concerned individuals about the recent market losses and how they can prevent them. Two of the biggest questions have been, “Do I need to worry if I have a pension?” and “Could I outlive my income?”
Let’s just have an honest conversation.
There are three buckets to put money into: the first bucket is Taxable Now, the second bucket is Taxable Later, and least mentioned is the third bucket, Tax Advantaged. We’ve all been taught since we were young, savings are important and we bought into it. Sadly, have you checked the current interest rates at your local bank? I remember banks used to brag about their interest rates; today they prefer not to mention them and when they do they make it sound like you’ll make bank, but he only people making bank is the bank.
We are partly to blame; we need to be responsible and ask the questions. Some of you may be thinking that you’re earning a sweet 4%-6%, yet those days are no more. Don’t take my word for it, ask your bank, please. If you did make more than $10 in interest, you would be sent a 1099 form which shows your interest as income and it is taxable, which you’ll have to include when you do your taxes. You’re probably thinking, “Wait, I make money, I get taxed, then I save money and I get taxed again, how does that make sense?” It doesn’t! It is just the way the IRS has structured it.
Now let’s discuss the second bucket, Tax Later. Most plans that fall into this group are Government-initiated plans (401K, 403B, IRA, 457, just to name a few). These plans allow you to put away funds for retirement in a pre-tax way. You keep contributing during your working years and you do not pay any taxes until you start drawing the funds out for retirement. Then you and Uncle Sam will become retirement buddies! When you decide to take a sum of money from these accounts, you’ll have to pay the IRS first before you get your share. The question to ask yourself is, “will taxes be higher now or 15 or 20 years from now?” In my lifetime, I’ve not seen them go down and I’ve never seen any rollback on taxes.
You need to know that you may not see as much annual income as you planned. The other concern is: if you leave it in your plan could it run out? Yes, it is possible, as many people are living longer today and it is a very real concern.
Now is a good time to share a little about the third bucket, Tax Advantaged. There are actually four other options that are not taxed when accessed to create an income. If there is an interest to gain more insight about these options I would be happy to spend more time explaining, but as I am limited on my article I will be happy to discuss on a one-on-one basis.
Let’s talk a bit on pensions. I believe most people feel very comfortable with a company pension but you may want to know who controls them. They are controlled by the Pension Benefit Guaranty Corporation (PBGC), a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) But is your pension is guaranteed? Maybe, but there are actually three ways it can be terminated:
1. Standard termination: An employer can voluntarily end a pension plan only after showing PBGC that the plan has enough money to pay all benefits owed to participants.
2. Distress termination: An employer can voluntarily apply for a distress termination if the plan does not have enough money to pay all pension benefits owed to participants.
3. Involuntary termination: Under the law, PBGC may take action and terminate a pension plan to protect the interest of the participants or the PBGC insurance program.
I want the people of Galveston County to know what is a risk. If you want to know more about ways to protect yourself from losses and learn more about Tax Advantaged accounts, we want people to know that there is a company here in Texas City that wants to help take the mystery out of Retirement and help people understand more through Financial Literacy.
