Is Wall Street in imminent danger?
By Paul Cross
Annuity National Brokerage Co.
Could Wall Street, the backbone of the financial world and the driver of the global economy, be in imminent danger?
Corporate pension plans are underfunded by billions of dollars, federal and state pension plans are under funded by a trillion, and Social Security, prescription drugs and Medicare are under funded by $109 trillion, at a time when the fastest growing age group in America is 100+. Will any of this have an effect on Wall Street?
Over 79 million baby boomers' 401(k)s are invested in the market, with corporate pensions underfunded by billons of dollars and state and federal retirement plans underfunded by a trillion. What effect could this have on Wall Street?
Outlawing the very tax incentives that encourage risky investments may have a major impact on Wall Street.
Major tax incentives that encourage risky investments
Capital gains tax structure: Investments held for the qualifying period are currently taxed at a rate lower than ordinary income. Currently, we pay no Social Security and Medicare tax on capital gains or passive income. This may soon change.
Stepped-up cost basis: A provision that allows heirs to inherit investment gains at current market value, thereby eliminating income tax and capital gains tax on the inherited investment, which encourages many seniors to hold. However, in so doing, it may cause some people to inherit a stepped down cost basis.
Dollar cost averaging: A tax strategy that lets investors average the cost of shares purchased over time for determining the capital gain and the capital gains tax. Dollar cost averaging is a highly promoted strategy that does not work to everyone's advantage. For seniors who need to liquidate some shares for income purposes, it may be wise to sell the shares with a higher cost basis -- perhaps at a loss or a small gain -- thereby reducing or eliminating capital gains and taxes, and passing on the profitable shares to heirs with a stepped-up cost basis.
Dollar cost averaging is often promoted with IRAs, 401(k)s, and other qualified retirement plans; however, the tax advantages of dollar cost averaging do not apply to qualified retirement plans. The full amount of distributions will be taxed as ordinary income.
Tax restriction on market losses: Investors are restricted on the recovery of tax dollars paid on the earned money that was invested and lost. We are restricted to a deduction from capital gains or a limited annual deduction from ordinary income.
The concern and the question is, "If capital gains tax rates are repealed and capital gains are taxed as ordinary income with Social Security and Medicare taxes imposed; to what extent will it affect Wall Street?
In 2011, the first of the 79 million baby boomers will reach age 65, but already, 10 thousand boomers daily are retiring early and signing up for Social Security. It was boomers that drove Wall Street, increasing the fund industry from $55 billion in assets to $10.7 trillion.
IRA and 401(k) monies are heavily invested in Wall Street funds and now, many are searching for safety to protect their retirement income.
Boomers are retiring from Wall Street. Many can no longer afford the losses of risky investments. Billions of dollars are transferred monthly into annuities and for many, safety is the number one reason. Some want to stop losses, while others want the advantage of income guaranteed for life -- an income stream they can't outlive.
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