Are You Setting Yourself Up for a Tax Day of Reckoning? Part 1
“Many individuals unknowingly set themselves up for a ‘day of reckoning’ – or perhaps ‘years of reckoning’ – with the federal govt. by saving to Retirement Accounts like 401(k)s and IRAs. Now…am I saying Retirement Accounts are bad? No. BUT one is wise to manage them well.
They can offer wonderful tax advantages as current contributions are often not subject to income tax. Therefore, these dollars WILL be taxed in the future when withdrawn from the accounts.
We are often trained – and we are even encouraged – to save ALL WE CAN to Retirement Accounts to provide for our future needs. We may hear people say that taxes are likely to be LOWER when we are retired. And for some people, that is the case. For others, taxes can be even HIGHER later in retirement.
One example is Required Minimum Distributions or RMDs. RMDs are essentially the government’s way of saying, ‘We’ve allowed you to save these dollars without tax for long enough. Now you’ve gotta start paying tax.’ Generally upon reaching age 70 ½ one must begin withdrawing this portion of certain retirement accounts and pay tax on the dollars. These RMDs start at about 4% of the account value BUT they increase as we age. So the longer we live, the larger the portion that must be withdrawn and therefore taxed.
SO unpleasant tax surprises can occur for those who’ve saved large amounts to retirement accounts and therefore have to take large taxable withdrawals…especially later in retirement. These withdrawals can push you into a higher tax bracket, therefore, creating higher tax rates.
Saving taxes today is great, but wise Tax Planning should also consider potential future taxes. Every situation is different, so you are wise to work with a team of experienced professionals to help you make wise decisions.
For more helpful information like this, visit our website at PayneWealthPartners.com. Thank you!”
Published: December 8, 2014
Authored by: Terry Prather, CFP®, ChFC®
Direct Phone: 812-602-6307
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