Are Taxes Going Up Will You Be In A Lower Or Higher Tax Bracket In Retirement
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Are Taxes Going Up? Will Your Tax Bracket Be Higher in Retirement?
Summary:
Over the past decade, I've consulted with clients about tax-free wealth distribution for retirement. This system leverages the Internal Revenue Code to find savings many advisors overlook. While contributions to IRAs or 401(k) plans provide tax benefits initially, the IRS eventually expects taxes on distributions, which can be risky if rates change. Contrary to common advice that you'll be in a lower tax bracket in retirement, this isn't guaranteed. We'll explore whether taxes might rise and how your retirement tax bracket could be higher than expected.
Understanding Potential Tax Increases
Let’s consider historical tax rates. In the mid-1940s, the highest marginal tax bracket was 94%, and as recently as the 1970s, it was 70%. Today, rates are historically low, but increasing government expenses could push them higher.
In 2006, government expenses surpassed revenues by $300 billion. Major costs include Social Security and Medicare, accounting for 37% of federal spending. National Defense and related areas take up another 24.5%. Individual income tax, the top revenue source, contributes 38% of government income, followed by social insurance tax at 32%.
Projected Tax Changes
David Walker, a key government accountant, testified that with baby boomers retiring and drawing benefits, federal spending would need to be cut by 60% or taxes doubled. Moreover, the 2003 Tax Act set future tax increases beginning in 2011.
Given historical tax rates, there's potential for an increase, contradicting the expectation of a lower retirement tax bracket. Your retirement income determines your tax bracket, which might be higher due to lost deductions like mortgage interest and dependent credits.
Retirement Income and Standard of Living
If your retirement income is significantly lower despite long-term saving, reconsider your strategy. Most aim to maintain or improve their living standards in retirement, not reduce them. Expenses like health insurance can rise, offsetting eliminated costs like mortgage payments. Relying on employer health coverage can be risky, as benefits might change, as seen with GM and Ford employees.
The IRS and Retirement Accounts
For 401(k)s, IRAs, and similar plans, mandatory minimum withdrawals begin at age 70½. Failing to meet these can result in a 50% penalty. Excessive withdrawals may lead to Social Security being taxed, emphasizing the IRS’s reliance on this revenue stream. However, proper planning can help avoid this tax burden.
Tax-Free Retirement Income Strategies
Fortunately, there are government-sanctioned methods to secure tax-free retirement income, known as asset shifting or distribution planning. The focus isn’t just on investment types but also on where to invest. I offer strategies to reduce retirement taxes or potentially eliminate them, ensuring social security remains tax-free.
If you need assistance with retirement planning or life insurance, contact me at 801-545-0696.
Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
[Stonecreek Wealth Advisors](http://www.stonecreekwealthadvisors.com)
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC
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