Rethinking Your Retirement Investments
Kiplinger.com is suggesting it is time to rethink your financial retirement portfolio. You may have built up a significant nest egg in a 401(k) plan, but it does come with serious baggage during your golden years. It is impossible to argue against the early stages of a 401(k) when employers match your contribution to the plan. You can take advantage of the tax breaks because contribution money comes out of your paycheck before calculating taxes and that money compounds every year. When you retire, however, the tax impact of a 401(k), 403(b), or traditional IRA can become significant.
You have probably been told at retirement time that you will be in a lower tax bracket however; it is more likely that the opposite will be true. Your tax rate is expected to increase. If you maintain the same standard of living, it will require the same amount of income, which translates to the same tax rate. Additionally, your children will be grown, the house paid off, and those substantial tax deductions are gone which may push you into a higher tax bracket. You will pay taxes on withdrawals from your contribution plan(s) annually irrespective of if the money comes from dividends, capital gains, or your contributions. That money will be taxed at your income tax rate at the time of withdrawal. Currently, the top marginal income tax rate is 37 percent, and taking into account the US deficit that tax rate could increase in time.
Double taxation can eat away at your retirement savings and is often the norm because you can pay more taxes on your Social Security benefits. Unless you have a Roth IRA, distributions from your retirement plans count against your tax situation when calculating what percentage of your Social Security is subject to tax. The result is you are paying more taxes on your retirement plan distributions and Social Security income. You are also paying more taxes from capital gains, dividends, and interest from your investments.
Required minimum distributions (RMDs) can be frustrating and expensive if you neglect to take them. You have to withdraw funds from your retirement fund accounts when the IRS deems it necessary. Even if you want to leave the money in the account, the IRS will schedule your withdrawals when you reach 70 ½ years old. There are stiff penalties for not taking out the required minimum distribution. You may pay as high as an additional 50 percent tax.
If you are married a 401(k) or IRA is the worst account to leave to your surviving spouse. No one wants to die without leaving their spouse financially secure, but these two financial vehicles are fully taxable accounts. Upon your passing, your spouse is about to change tax filing status from married filing jointly to single. That takes your spouse’s tax obligation from the lowest to the highest bracket. Probably not exactly what you had in mind.
Both your 401(k) and IRA plans are subject to tax law changes. Every time Congress convenes a session, there is the possibility that increases in taxes on your retirement plans can occur. It is highly unlikely that your taxes won’t increase. The US debt continues to grow at an alarming rate. The US government will tax its citizens more than ever to gain some level of financial control. Privatize the gains, socialize the losses is the federal government’s rule of thumb, particularly when considering how massive the US debt is.
Get together with a tax planner to identify ways to move your retirement funds into better financial retirement vehicles. Sometimes conversion can cost a bit of money upfront, but in the long run, you will be far better off with regards to your retirement tax obligations.
If you have questions or would like to discuss your personal situation, please don’t hesitate to reach out to our Troy office for a free consultation. Click here to send us a message or call us at (434) 589-2958.