How will taxes and regulations impact your spendable income in retirement?
We all want to be comfortable and be financially secure in retirement. There are many who think that earning more or investing in high risk, big reward instruments are the only ways to succeed. These same people tend to overlook that there are other ways to maximize how much we keep in retirement, and these strategies are needed just as much as any growth strategy. After all, what is the benefit of saving $1M, if you are going to lose a big portion to taxation?
If you want more in retirement and want to keep more of your hard-earned money, you need to consider and develop an effective and efficient tax plan.
Using the right tool for the right job!
Taxes have a big impact on our daily lives. We are taxed on everything… we pay taxes on earnings, on our purchases, and even on our estate when we die. Enable to develop an efficient tax plan, we need to have a certain level of understanding and know how money as well as taxation works.
With this in mind, let's take a look at a few types of retirement vehicles commonly used. People with a defined benefit plan also known as a pension plan must understand that all future distributions will be taxed. Others invested in defined contribution plans like an IRAs, 401k, 403b, or 457 plans are most likely deferring taxes and will have to pay taxes at a later time. Although these investment vehicles offer tax advantages today, it will cost you more later, during your retirement. As mentioned in a previous article, these financial products are not bad, they all promote financial wellness, but you must understand, that not all of them are built the same. Just like every tool, it serves a specific purpose. Would you use a hammer to cut a tree?
The Problem with Deferring Taxes.
Deferring taxes means you must pay it back later, it does not mean tax-free. Do you know what tax laws will be in place in the future and how much your tax bill will be?
Consider the economic deficit, The impact of Covid-19, inflation, etc. What do you think taxes will be in the future? How will these factors impact your family and future plans?
Tax Penalties and New Tax Laws.
Aside from uncertainty of income tax rates and laws, there are other problems people will have to deal with. Tax-Deferred Plans have limits and penalties. Do you know about the 10% penalty on early withdrawals for individuals under 59.5? In addition to this rule, people above the age of 70 or 72 (depending on date of birth) will have to take RMDs. Failing to take a minimum distribution will cost individuals up to 50% in penalties.
Furthermore, recent changes to tax law mandates beneficiaries take distributions over 10 years on inherited plans instead of over their lifetime (like before) which forces added tax payments on those distributions. This taxable event can be a very costly expense for high earning individuals, resulting in higher taxes, potentially losing their benefits to taxation.
Contribution Limits.
Another issue with traditional and Roth accounts is the contribution limit affluent investors have. A traditional IRA account has a higher threshold than a Roth account, and Roth accounts has a very low contribution limit that will leave individuals with a big gap in retirement.
Developing a tax-advantaged plan.
How valuable would it be to you, if you're shown a proven way to opt out of the tax system? Because taxation will have a major effect on your future spendable income, you should have a plan that minimizes your tax liabilities. Incorporating a tax efficient strategy is crucial to your success, do you want to develop a tax-advantaged retirement plan? Send us a message or schedule your free consultation with an Unifirst Financial Advisor.
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