Darcy K. Houghton: ERISA’s arrival in 1974 was a welcome revolution

You likely have heard that the Revolutionary War was based on colonists’ objection to taxes. In honor of Independence Day, I thought about financial independence and that a review of some of the regulation affecting how we approach finances and estate planning might be interesting.

We know that when earning money or transferring assets, we have to deal with income and estate taxes. We deal with sales tax, property tax and even those hidden taxes on things such as fuel, liquor and cigarettes. Historically, most taxes have been designed to incent or disincent behaviors. We have a mortgage-interest deduction to encourage us to buy houses, and we no longer have a general interest deduction because we don’t want to incent personal debt. Many complain that income taxes are too high, and they are much higher than the original 3 percent enacted in 1916. However, they are much lower than the 1950s’ highest marginal rate of 92 percent.

Social Security was enacted in 1935 as a system of federal old-age benefits for workers. In 1937, it taxed 2 percent of the first $3,000 in earnings. The retirement age was set at 65, but, interestingly, the average life expectancy was only 60. As has always been the case, the SSA advises that “Social Security is the largest source of income for most elderly Americans today, but Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.” It is critical to be saving for retirement, especially given that a spouse’s Social Security doesn’t continue after his or her death.

Thankfully, in 1974, the Employee Retirement Income Security Act was enacted. This was the beginning of the 401(k) plan. ERISA provided tax advantages to saving for retirement and while it doesn’t govern IRAs, this was the beginning of the era when individuals’ assets could grow tax-free and be passed to personal heirs at death. IRAs and 401(k)s now account for about 42 percent of all retirement savings. ERISA really changed how wealth is developed and transfers to heirs.

It is almost impossible to understand the extent of the ramifications from each of the above areas of law, but we do know that in financial and estate planning, they are part of every day’s decisions and thoroughly affect how we achieve financial independence.

And, just one more thing: Before I jumped on the tea party cliché, I did reread the Declaration of Independence (not just the preamble). On July 4, 1776, our founders may have reacted to the latest tax, but what they truly did was declare independence from a tyrannical king. They were greatly concerned with “inalienable rights” — life, liberty and the pursuit of happiness. In reviewing the oppressions of the king, it makes it easy to cast aside our political differences and on Independence Day celebrate this blessed nation we have.

Darcy Houghton of Carson City accepts cases in estate planning and business law. She may be reached at 775-882-1777, or visit her website at www.hou2plan.com.