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by Matt Dicken
June 29, 2017
by Matt Dicken
June 29, 2017
When people are asked what the biggest threats to their retirement plans are, they offer a host of responses. The most common include outliving their wealth, health insurance costs, nursing home expenses and having to help their children or grandchildren financially. All of these can be major threats to retirement plans, but there's one big one people tend to forget: taxes.
Having no clear plan to deal with higher taxes is one of the most serious threats to retirement-minded people.
For years, you have probably been told that, when you retire, you will be in a lower tax bracket than when you were working. We are advised to invest everything we can in our 401(k)s or equivalent plans because we will get a nice deduction now, and, when we retire, we won't need as much income. Since we won't be drawing a salary, our tax burden will be reduced.
This may be a myth for some.
Why your tax burden may not fall in retirement
There are three major reasons why many Americans may not get a tax break when they retire:
Actions you can take
There are some things you can do now to help prepare for these possibilities. Plan now to have as much money as you can in tax-free accounts, such as Roth IRAs, Roth 401(k)s and certain investment-grade insurance strategies. If your company matches your 401(k) contributions, contribute to it up to the match and take advantage of the extra money. Consider converting your IRAs to Roth IRAs over time.
Create some options for yourself, and do it sooner rather than later. If you wait until you have to start your required minimum distributions (RMD) at age 70½, it might be too late to take advantage of some of the available options. In some cases, the RMDs alone can cause your Social Security benefits to be taxed. If you have to pay tax on your Social Security benefits, it will not only be irritating and frustrating, but you will have to come up with the money to pay the income tax. Typically, it comes from withdrawing additional dollars from your IRAs, which will also be taxed. At this point, you are basically stuck with nothing else to do but pay the increased taxes.
Having a plan to deal with your tax burden in retirement can be the difference between having a successful retirement and struggling to meet your monthly expenses. Consider creating a plan now, because our tax burdens may get worse after we retire.
Kevin Derby contributed to this piece.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
Copyright 2017 The Kiplinger Washington Editors
This article was written by Matt Dicken, Founder, Strategic Wealth Designers, Ceo and Investment Adviser from Kiplinger and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.