Is there a Tax Bomb waiting to go off in your retirement plan?
You Need to Read This – There’s Time to ActIf you have money in a tax-deferred retirement account such as a 401(k), IRA or 403(b), you may be sitting on a tax time bomb. I’m going to explain the tax traps you face and show you how to move toward a 0% tax bracket in retirement (legally!) – but not by doing it the way most people do it, which is by being broke! Conventional wisdom says, “Maximize your contributions to tax-deferred plans. Your money compounds without being reduced by taxes, and you’ll end up with more money during retirement.” But like much conventional wisdom about personal finance, it’s baloney. The Society of Actuaries says if the tax rates are the same, “It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.” But most people look at their savings and think it’s all theirs. You may have forgotten you’ll owe Uncle Sam the taxes he let you defer (postpone) all those years – on every penny you’ve put in and every penny of growth. And according to Boston College’s Center for Retirement director, Alicia Munnell, “It’s a very big deal when people realize they only have two-thirds or three-quarters of what they thought they had.” If the tax rates are actually lower during your retirement, you might come out ahead by deferring your taxes. But where do you think tax rates are headed long term? You must consider what tax rates might be during a retirement that could last 30+ years. Most people we talk to think taxes ultimately must go up due to the aging demographics of our country and our unsustainable national debt, not to mention the massive cost of Coronavirus-related stimulus and bailouts. Our nation’s debt is now at $27.5 Trillion and growing daily. If tax rates do go up, and you’re successful in growing your nest-egg, you’ll simply end up paying higher taxes on a bigger number. You’ve probably been told you should expect to retire in a lower tax bracket, but many retirees complain that they’re actually in a higher tax bracket. That’s happening for two reasons: #1: Required Minimum Distributions (RMDs) Those pesky RMDs retirees have to start taking from tax-deferred accounts at age 72 – whether they want to or not – are pushing them into a higher tax bracket. #2: The “Social Security Tax Torpedo” Many people are surprised to discover their income from various sources causes 50 to 85 cents of every Social Security dollar they receive to be taxed. RMDs can trigger a “tax torpedo” that taxes up to 85% of your Social Security benefits. Financial planners and CPAs are seeing retirees’ tax rates double or more because of this!
Would You Like to Move Toward a 0% Tax Bracket?
The advantages of a properly structured private reserve plan include:
- No RMDs to push you into a higher tax bracket
- You put in after-tax money, which grows tax deferred and can be accessed tax free under current tax law – many who are concerned tax rates will go higher long term, lean towards paying them today to eliminate unpleasant surprises
- The income you take from the plan is not included when the IRS determines how much tax you’ll pay on your Social Security income
- The income you take doesn’t increase your Medicare premiums, unlike IRA distributions and tax-exempt bond income
- In addition to these retirement benefits, there are ways to use this plan during the years leading up to retirement.
- Your principal and gains are locked in and don’t vanish in a market crash
- A return that’s significantly greater historically than savings or money market accounts or CDs – over time, the return on these plans can be equivalent to a 5-7% annual return in a tax-deferred account, but without the risk of stocks, bonds, and other volatile investments
- Liquidity and control of your money to help you weather the unexpected challenges life throws at you – with no government rules on when or how you access your funds
“It’s a very big deal when people realize they only have two-thirds or three-quarters of what they thought they had.”