ARE HIGHER TAXES ON YOUR RETIREMENT HORIZON?

Most of us have been programmed to believe that when we retire we will be “in a lower tax bracket.”  Most Americans who use an IRA or 401k (403b,457, etc.) to save for retirement think that they are saving money because they are not forced to pay tax on those earnings while working.  But, what will that look like when they retire?

          For most workers, the biggest write-off we have is the interest we pay on our mortgage.  Will we have that deduction when we retire?  Will we have children living at home?  Medicare recipients rarely ever have a medical deduction or meet the 10% threshold for a write-off. 

            So, will you be in a lower tax-bracket when you retire?

          You paid in to Social Security as a “supplemental income” source and now you may also have to pay taxes on that income depending on how much other money you are using for living expenses and where that money comes from. 

          If you are single/qualified widow/widower and your retirement income is $25,000-$34,000 you are taxed on 50% of your SS income.  Over $34,000 85% is taxed.  Married: $32,000-$44,00 -50% is taxed.  Over $44,000 – 85% is taxed.    

          So, let’s say your single and your SS income is $1300 per month = $15,600 per year and you need $50,000 to live on.  So, you take $34,400 from your pension/IRA/401k retirement accounts to meet the budget.  If single, you now pay taxes on $11,470 of Social Security income.  Your Federal Tax is $4642 per year.  

Where do you get the $4642 to pay the taxes?  From the same “qualified” accounts (IRA/401k, etc.)?  If you take it from “qualified” account you now pay taxes on $13,260 of SS and your Federal Tax is $5922.  It’s a vicious cycle.  If you are a couple and can live on $50,000 per year you have the advantage of an extra “standard deduction” and your Federal Tax is only $2748. 

          And remember, you will be forced to take a “Required Minimum Distribution” at age 70 ½.  That means even if you do not need that money now, or are hoping for it to grow for income later, you are forced to take it as income and pay those taxes. 

          And what if tax rates go up when you are retired?  We are enjoying one of the lowest tax rates in history. But, that will most likely have to change. 

          The United States is the most powerful country on earth.  California is the 6^th largest economy in the world surpassing France (7^th) and India (8^th). Interestingly, India has the most up-and-coming economy.    California’s debt is now an astounding $443 Billion.

           The US has an amassed debt of over $19 Trillion (with a T).  Interest payments on that debt are the largest in the world and run neck-and-neck with the European Union of 28 countries.  The federal government currently pays $223 Billion - 6% of the entire budget - on interest payments.  That is more than what America produces in one year. Two-thirds is owed to Treasury-bond holders.  The Treasury Yield is percentage rate US pays to borrow money. When interest rates go up the government pays more on that debt. 

  What do you think the most likely solution to this problem may be?  Do the M-A-T-H.  Tax rates will have to double at some point in our future!

          If you have not seriously explored how to re-diversify your savings so that you have “non-taxed” income to manage the tax hit in retirement, now is the time to do so.  Roth IRA is only one component but you are limited to your contributions so it’s not the best option for everyone.  There are solutions that do not cap how much you add, the money grows tax-deferred and you enjoy a tax-free income stream when ready to retire. 

Our goal is to add more money to your retirement lifestyle.                             Give us a call (800) 546-4126