Like most people, you may think you'll be paying fewer taxes in retirement.
That's understandable because you're no longer earning a paycheck.
But unfortunately, that won't be the case for most hard-working Americans.
You could be paying even more taxes in retirement if you're not careful.
The good news is you have more control over how much you pay in taxes in retirement than at any other time of your life.
The following are three tax traps that could wipe out your nest egg.
Tax Trap #1: higher taxes could be just around the corner
Most people don't realize it.
But taxes are lower today than they've been in over 40 years.
Unfortunately, that's about to come to a screeching halt.
Growing national debt, changes in Washington, and new policies could impact you more than you might think.
Our Federal government has spent trillions of dollars in much-needed economic stimulus to help Americans get back on their feet from the pandemic.
But make no mistake about it, this money isn't free.
Someone has to pay for it.
And when you consider that our national debt is rapidly approaching a record $30 trillion, there could only be one solution:
Taxes. Must. Go Up.
Given the severity of our situation, taxing the wealthy may not be enough.
All hard-working Americans could pay the price.
And If you want to retire in the next five years, these higher taxes could have a devastating impact on your taxes in retirement.
You could be paying higher taxes on your tax-deferred retirement accounts (IRA and 401K); social security benefits; investment income, and more.
Ultimately, this could leave you with a fraction of your hard-earned retirement savings.
Tax Trap #2: not having a withdrawal strategy for your IRA and 401K
Contributing money to an IRA or 401K is pretty simple.
You make automatic contributions from your paycheck or personal bank account.
You choose your investments.
You get an immediate tax break on these contributions.
And then, your money grows tax-free.
There's nothing complicated about it, right?
Here's the deal:
When you want to withdraw this money in retirement, things get really complicated.
Without even realizing it, you could trigger:
- Higher taxes on your retirement accounts
- Higher taxes on your social security benefits
- Higher taxes on investment income
- Higher Medicare premiums, and more.
A good chunk of your money could needlessly be lost to taxes unless you plan ahead.
–Ed Slotti 'America's IRA expert'
IRAs, 401Ks, and other tax-deferred accounts are also subject to RMD's, otherwise known as "required minimum distributions."
So what does this mean to you?
In a nutshell, when you turn 72 years old, the IRS forces you to withdraw money from your IRA and 401K. It happens every year until your account has a zero balance or you pass away.
You're forced to withdraw money, one way or the other, even if you don't need it or if the stock market is up or down.
This requirement could set off a chain reaction of events, including pushing you into a higher tax bracket, and/or selling investments at a loss (and you'll never get this money back again).
And if you don't follow these withdrawal rules to the "T," you could trigger a 50% tax penalty - the highest penalty levied by the IRS.
Tax Trap #3: you could pay taxes on your Social Security benefits
It could hit you like a ton of bricks.
You've done your homework, and you know approximately how much you'll get in social security income every month.
But then you learn you could pay taxes on up to 85% of your benefits.
So, the benefits you were counting on to help pay for your retirement could be much less.
The good news is there are ways you could reduce or eliminate these taxes on your benefits.
The key is to get in front of it before you file for social security.
Here's the bottom line:
Taxes will likely play a much bigger role for the next wave of retirees—more than any other generation.
But it's not all doom and gloom.
If you take advantage of some defensive tax planning strategies right now, you could save yourself tens of thousands—if not hundreds of thousands of dollars in retirement.
But the window of opportunity is closing fast—so don't wait.
If you want to learn more about how you could save money on taxes when you retire, click here to watch a 30-minute educational video presentation.
Or, if you want to learn exactly how much money you could save in taxes in retirement, schedule a free Retirement Tax Analysis with one of our fiduciary advisors by clicking here or by calling: 801-829-9814.
We'll leave you with these parting words of advice:
It's not what you make. It's what you keep!
Ryan Thacker and Tyson Thacker are the Founders of B.O.S.S. Retirement Solutions with 6 offices throughout greater Salt Lake City. B.O.S.S. They are the winner of Utah's "Best of State" Award for Retirement Planning.
Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and no statement contained herein shall constitute tax, legal or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Our firm is not affiliated with the U.S. government or any governmental agency.