Concerned that you might be in a higher tax bracket when you retire than when you worked? Worried about the possible taxation of your future Social Security benefits?

Join the club.

With all the publicity given to studies showing that many workers will retire to higher taxes, participation in qualified plans has declined.

In fact, higher taxation in retirement is what some would call a "Cadillac Problem"--- a rather exclusive malady. Be grateful if it's a problem you face. It means you've got better benefits and more assets that most people.

It turns out each of us can have a small fortune in qualified accounts--- $200,000 to $400,000--- before we have to pay a dime in income taxes. We owe it to the personal exemption and standard deduction on our tax returns.

While our friends in Congress continue fiddling with the tax code every year, two parts of it have remained essentially unchanged since the mid 1980's. That's when they revised both the personal exemption and the standard deduction and indexed both to the annual change in the Consumer Price Index.

In every year since, the personal exemption and standard deduction have risen.   The personal exemption, for example, was $1,000 in 1984. This year it is $3,050. And it will rise to $3,100 for 2004.

This is important.

It means that a person filing a single return is certain to have $3,100 of income that will be completely tax free. It means that a married couple with no children or other dependents can have $6,200 of income each year, tax-free. So if you retire and withdraw at a sustainable 4 percent annual rate from your IRA accounts, you can have $77,500 in your accounts if you are single and twice that much, $155,000, if you are married and claim two personal exemptions. Since the exemption is indexed to inflation, the amount you can have will rise each year.

To put those figures in some perspective, a recent Congressional Research Service study indicated that the median value of retirement accounts held by households between 55 and 64 years of age was only $55,000 in 2001. That means over 50 percent of all households with retirement accounts--- and 37 percent of all households have no retirement savings accounts--- don't need to worry about taxes on their retirement savings. Whatever their current tax rate, their future tax rate will be zero.

The average value of all retirement accounts for 55 to 64 year old workers was $189,779, indicating that some workers have very large retirement accounts. They may need to be concerned about taxes.

But they don't have to be too concerned.

We haven't figured the standard deduction. This tax break was scheduled at $4,750 on single returns for 2003. It is expected to rise to $4,850 for 2004. Those filing joint returns get an even bigger break because the 2003 tax cut increased the standard deduction on a joint return from $7,950 to $9,500. It is expected to become $9,700 for 2004.

In other words, a single tax payer withdrawing at 4 percent a year can have another $121,250 in qualified plans while a couple filing a joint return can have an additional $242,500. Add the personal exemption and standard deductions and single return filers can have nearly $200,000 ($198,750) in qualified plans before regular withdrawals at 4 percent provoke any income taxes.

Couples filing joint returns can have twice as much, a whopping $397,500 in retirement account assets before they are likely to face any taxation at all. (One caveat: taxpayers eligible for defined benefit pensions--- about one worker in four--- or with other sources of investment income have to make adjustments for that income.)

In fact, only a small portion of U.S. households has financial assets in this $200,000 to $400,000 range. The same study shows that the median net worth of households age 55 to 64 in 2001 was $181,500. This figure includes all assets--- home equity, automobiles, insurance cash values, business equity, bank deposits and savings as well as retirement accounts.

Why am I telling you this?

Simple. For a large majority of working Americans, traditional qualified plans are still the best way to save for retirement. If you've got a 401(k) or 403(b) plan at work, use it. Worry about saving in non-traditional qualified plans when you think you've got $200,000 or $400,000 "in the bag."

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