Higher Taxes

Did you know that all of your 401(k) and IRA account balances don’t belong to you? It’s true – since you haven’t yet paid tax on it, part of your account is an embedded tax liability that belongs to Uncle Sam. For example, if you’re in the 24% tax bracket, for every $10,000 in retirement savings you withdraw, you only get to spend $7,600 while the IRS gets the other $2,400. That $500,000 you might have saved is only worth $380,000 after you subtract the tax liability.

On the other hand, what if some smart, proactive tax planning puts you in the 12% tax bracket? Now you’re getting to spend $8,800 of every $10,000 you withdraw, and your $500,000 is worth $440,000 toward maintaining your lifestyle.

Remember, it’s not what you earn. It’s what you keep.

Please click on the links to learn more about:

Have a question about Higher Taxes? Contact us now.

Higher Taxes

Did you know that all of your 401(k) and IRA account balances don’t belong to you? It’s true – since you haven’t yet paid tax on it, part of your account is an embedded tax liability that belongs to Uncle Sam. For example, if you’re in the 24% tax bracket, for every $10,000 in retirement savings you withdraw, you only get to spend $7,600 while the IRS gets the other $2,400. That $500,000 you might have saved is only worth $380,000 after you subtract the tax liability.

On the other hand, what if some smart, proactive tax planning puts you in the 12% tax bracket? Now you’re getting to spend $8,800 of every $10,000 you withdraw, and your $500,000 is worth $440,000 toward maintaining your lifestyle.

Remember, it’s not what you earn. It’s what you keep.

Please click on the links to learn more about:

Rising Taxes
Other Tax Obstacles in Retirement
Taxes For Your Heirs
Tax Planning

Have a question about Higher Taxes? Contact us now.

Rising Taxes
The truth is that we don’t know what tax rates are going to be in the future. Our current lower tax rates expire in 2025, and we WILL go back to the higher tax rates that were in effect before the Tax Cuts and Job Act of 2017. The expiration of the tax rates is already in the current law, so Congress has to do exactly nothing for them to reset to the old higher rates.If you factor in our ballooning national debt and the increasing pressure on Social Security and Medicare as 10,000 baby boomers retire every day1, future tax rates could be even higher. As of 2019, the national debt is over $22 trillion and rising fast. The U.S. Federal Budget for 2020 is $4.7 trillion, of which $2.8 trillion is mandatory spending which includes Social Security, Medicare and Medicaid. Do you think the Congress is going to cut spending on these social safety net programs or take an easier path and raise money by…you guessed it: raising taxes. And these unknown future tax increases could eat into your retirement savings, using up your money faster than you expected and forcing you to cut back on your lifestyle.
Other Tax Obstacles in Retirement

Once you get to retirement, there are proactive, often-overlooked ways to manage your tax bill. For example, it’s important to pay attention to the tax-efficient order of withdrawals. There is a science around knowing which type of account to withdraw from, in which year, to minimize your taxes.

Another tax hit is the Required Minimum Distribution (RMD’s) starting at age 70 ½, when the IRS will dictate to you how much MUST be withdrawn from your retirement accounts and included in your taxable income. Planning for this tax milestone is imperative.

Taxes For Your Heirs

And the tax hits don’t stop at your passing. There are actually several different types of tax triggered when you die, including estate tax and income tax. Under the current tax code, estate tax only comes into play if you have more than $11.4 million in assets, so for the vast majority of us it doesn’t apply. But income tax is another story and that depends on what type of account is inherited, and whether beneficiaries have been named or not.

Many retirees think that their estate planning is done because they have a will. But that’s not necessarily true. Beneficiary forms for IRA’s and 401k’s take precedence over the will. In 2009 there was a Supreme Court case where a deceased man’s daughter argued that she, not his long-divorced wife, should get his retirement plan dollars. The ex-wife even waived her claim to the funds during the divorce. But the court ruled unanimously that, because the beneficiary form was never changed to remove her as sole beneficiary, she got it all2. Beneficiary forms are filled with landmines – one wrong move or one missing contingent beneficiary and unnecessary taxes have been triggered.

Even if you have all of your forms filled out correctly, your family can accidentally blow it when they complete the paperwork to inherit your retirement account. By choosing the wrong payout option, they can accidentally create huge tax liabilities for themselves, and there are no do-overs. The IRS will not let them “un-ring the bell”. The tax has to be paid – and there goes more of your hard-earned savings to the IRS instead of to your family. You need to educate and prepare your family members ahead of time, so they can make smart choices with your money!

Tax Planning

Proactive tax planning is easier than you think. In the years leading up to retirement, build multiple types of savings: taxable, tax-deferred and tax-free. Don’t fall for the trap of putting all of your savings into the tax-deferred bucket, and then get shocked with high taxes in retirement. Use a mix of taxable brokerage accounts, tax-deferred retirement accounts and tax-free Roth and Health Savings Accounts. For higher income earners who may not be able to contribute to a Roth IRA, you can look to permanent life insurance to create similar tax-free streams of income in retirement.

Clearly, tax knowledge is a key component of a successful retirement, but do you want to sit around reading the tax code, when you can be out enjoying life? This is not do-it-yourself territory. We are well versed in Roth IRA strategies, tax-efficient order of withdrawals, RMD and QCD rules, as well as legacy planning. Because we are CPA’s as well as CFP®’s, we can give you tax advice in conjunction with proactive tax planning. A typical investment advisor cannot. You don’t want to pay any more in taxes than you have to, and we don’t want you to either.

Read more about our Tax and Legal Solutions.

Call Us at (865) 622-2162