Peter, good to see you.
Welcome back everyone. Today we're going to talk about four reasons your taxes will be higher in retirement. Many people assume their taxes will be lower in retirement, but that's not always the case. In fact, there are four good reasons you can plan on your taxes being higher in retirement. So first, you of course don't want to compromise your quality of life in retirement, so you probably won't be spending less. In fact, you may be spending more and you will need the income to support that lifestyle. Well, nowhere in the tax code does it say retirees pay less in taxes.
No, right there. There are streams of income, Social Security, that only a portion of it may be taxed, but most people have the income that they exceed thresholds where a good portion of their Social Security is taxed. And then more importantly, like in retirement, every day is a weekend on vacation. And I know that I am either at work earning money or I'm out in the world spending money. And if I am having less time or no time at work earning money, that means I've got more time out in the world spending money. And, and this generation of retirees is generally very healthy and active and has goals and dreams and aspirations and things that they want to do, all which cost money. So we're going to be having to make withdrawals from generally taxable retirement accounts that causes our taxable income to stay in about the same place. You know, the tax brackets are pretty wide and most people don't suddenly jump down in their tax bracket the day after they retire.
They a lot of times spend just about the same, if not a little more money, especially in the first several years of retirement as we are doing all of those things we always dreamed about doing, but just didn't have the time for. So we are making those taxable withdrawals staying in the same tax bracket, but it's not promised that those brackets stay in the same place that they are now. And so that's the big concern, Erin. Right.
All right. Reason number two, tax rates are set to increase and many financial experts believe the tax cuts and jobs act of 2017 reduced federal taxes to the lowest they may ever be. And those cuts are set to expire at the end of 2025.
Yeah. Well, we had a period of time where taxes were very, very, very low non-existent. And then after the great depression low, and then they spiked up to as high as a 90% federal tax rate bracket.
And you know, that was obviously exceedingly high and promoted some people to get into politics that said, this is not the way things should go. And now they have come down, you know, that saving in these tax deferred accounts over the last 30 to 40 years has not been a mistake because tax rates and brackets have come down over that time. But where they are today more than likely is not where they're going to stay into the future because they fluctuate those tax rates, those brackets, how much we pay in taxes fluctuate over time. And so the 2017 tax cuts and jobs act was an eight year measure and it will expire December 31st of 2025. In order for that not to happen, the Congress, the Senate and the president all have to pass and agree to new tax legislation.
And unless there's a unilateral color across those bodies, then I'm not sure that the likelihood of getting any forward progress on new tax legislation is highly likely, which means de facto, we follow the rules, the laws that are in place now. Tax law already on the books is that tax rates will increase January 1st of 2026. And so when the 2017 tax cuts and jobs act expires, the 12% bracket goes to 15. That is not a 3% tax increase. That is a 25% higher bill on those dollars. The 22% bracket goes to 25. The 24% bracket goes to 28. Across the first $200,000 of income for the average married couple, that's about an 18% higher tax bill on the withdrawals that you may be making from retirement accounts or the income that you're making from working. And so those tax rates and brackets are likely to change in the future.
In fact, I'd say more likely than they are not to increase into the future. And when I ask people, which direction do you think taxes are going into the future? Almost to the person, they all point up and say that taxes are going to have to go up into the future. And yet we still seem to be planning the de facto default mindset of how to handle taxes on retirement dollars is still to defer and delay paying taxes.
And those two things are directly contrary. If we believe that taxes are going to be going up in the future, then we should be planning according to that expectation and going ahead and paying taxes now while we think, and while we essentially know if nothing else is done, that they are lower than they are going to be into the future. All right, next we have required minimum distributions or RMDs. Explain how these distributions affect our taxes.
Yeah, they make them go up. The government at a certain point in time wants their tax dollars. And again, this generation has spent the last 40 years of their career by and large saving for retirement, but not paying taxes on those retirement accounts. So now they've grown and they've built and they've accumulated and they've got this lump sum of yet to be taxed money. And I've got a lot of people who come in and rightfully so are very proud of themselves for being debt-free, right? The kids are off the payroll, the house is paid off, they're not carrying any balances on anything. And then we look at their retirement accounts and they've got 401ks and IRAs, and I have to break the news that you're not quite debt-free yet.
And they say, well, what do you mean? And I say, well, you've got a debt to the IRS right here inside the balance of this account. And if you don't believe that it's a debt, just wait until they start requiring minimum payments, just like a credit card bill or a mortgage payment, they require that you pay that debt sooner or later. And if you have the wherewithal and the income that you don't have to make withdrawals from those retirement accounts, which there are some people that don't, but guess what? Eventually the IRS requires it.
So there's kind of, there's been some law changes that used to be 70 and a half, and now it's 73 and it graduates up to 75 for those born after 1960. But eventually the government starts requiring that you make those withdrawals. And for a lot of people that bumps you into an even higher tax bracket, paying a higher tax rate. And the compound effect is that you let those taxes defer and let that account continue to grow. The IRS is not stupid in this arrangement for letting you defer and delay. They are right there with you with their arm around you cheering when your account balance grows, because they know that means that they get to harvest a larger tax bill into the future. And so handling that tax bill now defaulting to the IRS's plan, probably not in most people's best interest. That's why we are very proactive in planning to handle the tax bill in as efficient and effective a manner as possible. And a lot of times that means paying a little bit more tax sooner rather than later. Taxes are on sale now compared to what we know the price is going to be later.
Why not pay the taxes while the prices are on sale at a discount? All right. And last, the writing is on the wall. Hold your breath, Peter.
Ready? Government debt stands right now at $35 trillion. By the time we're done recording, it might be at 36. Yeah. The government has two options to make up that deficit, reduce spending or increase revenue, i.e. raise taxes. So like I said, the writing's on the wall.
Yeah. They don't cut spending, right? We are still spending it at pandemic levels here to the tune of almost $7 trillion a year when we only bring in a portion of that in tax revenue. And that's why you see that number clicking away so rapidly. And we're basically just a wink away from $36 trillion in debt.
And that's not even including, by the way, the liabilities for Social Security and Medicare, the unfunded amount that they've promised to pay the American tax paying citizens already. And so we are deep, deep, deep in a hole here. And you're right, Aaron. There's only a couple of ways to get yourself out of a hole. Stop digging, right? Or fill it in quicker than you dig. The government is not going to stop digging.
They just, they love spending money. And so what they're going to have to do is raise taxes to help fill in that hole there. We anticipate this. We can see it coming.
It's that train at the end of the tunnel just heading right for us on the tracks. But yet so many people just have this aversion to going ahead and paying taxes now so that they get out of the way personally of that train. As a nation, I don't think we're going to get out of the way of it. But we personally can take proactive steps to veer off onto a different track and go ahead and pay our taxes proactively. And that ultimately is going to be, I think, one of the biggest financial opportunities that people either take advantage of or miss over the next decade or more.
Interesting. You know, Peter, I'm really glad we got to talk this through. This topic has been a favorite of mine. I almost feel like it should be a required viewing for everybody who's not in retirement yet. If somebody would like to talk through some of these strategies then to prepare for, you know, have a tax plan in retirement, what's the best way to reach you?
Give me a call, 919-300-5886, 919-300-5886. Whether you are planning generational wealth and looking at the tax implications of your legacy, or you are just beginning saving for your retirement, or even like in that transitional period is probably actually the best place to plan proactively for taxes. But anywhere in your journey, being efficient and effective with handling that tax liability is going to be beneficial for the financial picture.
So it needs to be a point of discussion. And I talked to a lot of people who say, hey, my advisor doesn't make any kind of tax recommendations. Now I am not an accountant. I am not a CPA.
And I don't make specific tax recommendations when it comes to preparing of the tax filing document for last year. But what I do have to include is the tax implications of any financial move that we are recommending and what are the effects going to be in the future. So I'm trying to help my clients save, not just last year, but this year and four years into the future, when we look at the investments with a tax planning perspective. And so that is one of the biggest and best opportunities I think that we have financially again. And give me a call if you need to optimize your plan from an income or investment or tax standpoint.
Planning for legacy, planning for how to handle healthcare, all of those things go into the optimized retirement plan. You can also email me, peter at rashaunplanning.com. You can go to the website, it looks like richonplanning.com.
There's a little button to get started right there on the website that can, you can click that button and set up a time for a quick phone call or a complimentary planning review and strategy session. And Erin, I also have a website online if you want to look at the implications of those RMDs, defaulting to the IRS's plan on those tax deferred dollars, 919retired.com. Now 919 is the area code around here.
So 919 retired with a D like it's past tense, 919retired.com is a great website to put in your numbers and see your retirement tax bill calculator, run the numbers for you. That's great. Peter, thank you for your time today. Always a pleasure Erin, thank you.
Hey folks, Peter Rashaun here with Rashaun Planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at 919retired.com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401k or IRA, this is the website. This is the resource where you can go, you can plug in your own numbers, your information, you can slide the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant savings.
So if you have not yet, go to the website 919retired.com. Run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management a registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2024-11-30 10:21:11 / 2024-11-30 10:26:54 / 6