Legislative Risk
Legislative risk is the fourth risk savers encounter.
Now, legislative risk is a pretty simple concept. It’s the idea that Congress changes the rules and those changes negatively impact your retirement approach. We are currently in an environment of heightened legislative risk. Why do I think that?
Well, let’s look at what’s happening in Washington and all around us. We currently have a federal debt of $32 Trillion – a debt that is larger than the US economy.
Now our debt was not looking great in 2018-2019, but with all the economic spending of the past three years. It shot the debt through the roof and that spending has continued in Washington.
Congress has been debating trillions of dollars in tax and spending legislation over the past few years and we’ll dig into some of these proposals in just a moment.
But one thing I want to comment on is and maybe you’ve heard this quote from President Biden or members of Congress, the saying Nobody making under $400K would have their taxes raised, period. And that might give you false comfort because I’m here to tell you, this is absolutely not true.
And I say it not because I think President Biden is lying or that Congress is being deceitful. It’s that I truly understand that Congress and our government do not consider the real ways that taxes rise on American savers.
So I want to look at three ways that taxes can rise for you regardless of whether you make under $400,000 or over $400,000.
So the first way that taxes rise, the real way that taxes rise on American savers. The first of these is tax brackets. Now we just discussed that if you don’t want to take a lifestyle cut in your retirement, chances are your tax bracket is not going to be significantly lower in retirement than it is today because you’ll need to maintain that income.
That’s not the only way brackets can change.
It’s not just situational about you. Brackets can change around us through acts of Congress. In fact, we know tax bracket rates are rising in 2026. How do I know that?
Not a magic ball, but I remember that 2017, Congress passed and the president signed into law comprehensive tax reform sometimes called the Trump Tax cuts. And those tax cuts lowered bracket rates for millions of Americans. Your rates may have dropped at this time, right? You have to remember that those individual bracket reductions were not permanent and in fact they sunset at the end of 2025 which means that unless Congress passes a new law to extend those bracket reductions, all of our tax brackets are reverting back to their old, higher rates come 2026.
So Congress can absolutely move tax brackets around us.
The second way tax brackets can change around us regardless of our income is if Congress changes deductions.
So if you’re earning $100,000 a year and you can deduct $20,000 a year, then you pay taxes on $80,000 of taxable income. What if next year, Congress passes a new law and suddenly you can only deduct $10,000 a year in taxes. Now you’re paying taxes on $90,000 of taxable income. Did your bracket change? It didn’t. Did you end up paying more taxes in retirement and less money to spend on yourself, absolutely.
The third way taxes can rise is simply new taxes. This is where Congress can get creative. What new things can they tax?
A great example of this is Social Security. When you begin drawing Social Security, that income is taxable up to 85% of your benefit, but it wasn’t always that way and it doesn’t t always have to be that way. Tomorrow, Congress could pass a new law, the president could sign it, saying 100% of your Social Security benefit is subject to taxation and there’s nothing you can do about it.
In other words, regardless of your income level, Congress has a lot of authority to change your tax rates. And if they change your tax rates. And if they change the way your retirement assets are taxed, that could mean you’re sending more of your income to Washington and having less to spend on yourself even if nothing about your personal situation has changed.
So speaking of new taxes, Congress is debating trillions of dollars in tax spending bills;
1. New RMD for total retirement assets over certain levels
2. Limitations on retirement account contributions
3. Limitation on Roth conversions
Responsibly Funding Our Priorities Section-by-Section Fact Sheet US House Committee on Ways and Means, pub. 9/15/2021
Revealing where the government may look for new tax revenue in years to come and that is in retirement savings accounts and that’s a big change.
The Secure Act legislation passed in January of 2020 created changes for long-term retirement savings financially impacting Americans at every age.
We are in an era of heightened legislative risk for qualified accounts: 401(k)’s, 403(b)’s and Roth accounts regulated under Title 26 of the US Tax Code Section 7702.
How much could taxes rise? We don’t really know. Historically, in 1998 the tax rate was 28% and 2018, after the tax cuts, it was 22%. If the Trump Tax cuts end in 2026, the tax rate could rise to 30% or higher.
How does IUL help overcome this heightened risk?
Here’s the challenge with IRA’s and 401(k)’s: they’re accounts. And that means that when Congress passes a new law, it takes immediate effect.
So if I have an IRA and I have saved in the IRA under a given set of rules in the tax code, Congress tomorrow can pass a new law that changes the rules that apply to my IRA and there’s nothing I can do about it. It doesn’t matter if those weren’t the rules when I started saving in my IRA. It’s a qualified account and the rules can change at any time.
What does IUL have that the IRA’s and 401(k)’s do not? It’s not an account, but it is instead a contract. And the rules around contracts are very different than the rules around accounts.
Because in a contract, if Congress comes and changes the law, those laws apply to contracts initiated from that date going forward, but they are not applied retroactively to contracts already in place.
And we saw this in the 80’s and 90’s with the TAMRA and TEFRA regulations. The new laws that Congress passed were applied to life insurance policies going forward. The courts have upheld that you cannot apply the law retroactively.
By diversifying into IUL, you are creating a pool of assets that are immune from future changes coming out of Washington.
We’ve gotten those assets out of the line of fire. It’s an incredibly important feature of Indexed Universal Life and an important reason for IUL to be part of your retirement savings approach.
A complete approach to retirement is stronger with an IUL:
Indexing helps overcome market risk. Features and benefits enable a more predictable income. Tax-free policy loans and tax-free death benefits help solve tax risk. Because IUL is a contract, you are protected from changes in Washington and are protected from legislative risk.
IUL checks off all four retirement risks and helps you create a more complete approach to create a more stable and secure retirement in the future.