Are Taxes Going Up Will You Be In A Lower Or Higher Tax Bracket In Retirement

For the​ past decade I have talked with clients every day about a​ system to​ distribute wealth for retirement tax-free. This system outlines exactly how to​ apply the​ Internal Revenue Code rules to​ your individual situation and find tax savings for you,​ which,​ in​ many cases,​ other advisors don’t know exist. Look at​ it​ this way. While saving for retirement in​ an​ IRA account or​ 401(k) plan may have provided you​ with tax savings when you​ made those contributions,​ there comes a​ day when the​ IRS wants you​ to​ pay the​ tax bill. When that time comes,​ you​ don’t want to​ be subject to​ tax-rate risk. Tax-rate risk is​ the​ ability that congress has to​ change the​ amount of​ taxes you​ pay on​ those distributions. We hear people on​ TV always promoting a​ 401(k) or​ IRA. They say something like,​ “You are in​ a​ higher tax bracket now and you​ will be in​ a​ lower tax bracket in​ retirement.” This just may not be the​ case,​ as​ we will talk about today. For some reason,​ these same so-called financial experts don’t seem to​ know where taxes have been,​ what is​ happening in​ congress,​ or​ what really determines one’s tax bracket in​ retirement.

So the​ topic of​ this month’s newsletter is​ to​ address the​ question of​ could taxes go up in​ the​ future and could you​ be in​ a​ higher tax bracket in​ retirement?

Let’s start with what the​ highest marginal tax bracket has been? According to​ the​ IRS,​ in​ the​ mid 40s the​ highest marginal tax bracket was an​ astounding 94%. as​ recently as​ the​ 70s it​ was as​ high as​ 70%. Currently we are at​ historic lows. So the​ question is,​ what could cause taxes to​ go up?

Well you​ probably guessed it,​ the​ need for more revenue. Government expenses were 300 billion more then their revenues according to​ the​ 2018 reports from 2018. the​ number one cost to​ the​ government is​ Social Security and Medicare,​ taking up 37% of​ the​ federal expenditures. National Defense,​ Veterans,​ and Foreign Affairs come in​ second at​ 24.5%. of​ course,​ other things like wars,​ hurricanes,​ and terrorism don’t help either. Guess what they report as​ the​ number one income source for the​ government? Yup you​ guessed it,​ individual income tax,​ making up 38% of​ their revenue. Coming in​ second is​ social insurance tax,​ making up 32%. This is​ where it​ gets scary. David Walker and Ben Bernanki both agree 100% on​ this topic. David Walker is​ the​ person who audits the​ government's books and serves as​ the​ investigative arm of​ the​ U.S. Congress. He is​ also the​ government’s chief accountant. He said in​ his testimony before the​ budget committee of​ the​ U.S. Senate,​ this year:

“Because this baby boomer generation is​ retiring and drawing on​ social security,​ Medicare,​ and Medicaid,​ that the​ government will either have to​ cut federal spending by 60% or​ raise federal taxes to​ 2 times today’s level.”

In the​ 2003 Tax Act they have already set in​ motion for all of​ the​ tax brackets to​ go up starting in​ 2011. What that means is​ you​ will be paying higher taxes.

We already know where taxes have been in​ the​ past,​ which tells us where they could go in​ the​ future. So when these so-called financial experts say you​ will be in​ a​ lower tax bracket,​ they must not be looking at​ the​ fact that tax rates are going up. the​ only other area they could be looking at​ would be your income in​ retirement. Your income is​ what determines what tax bracket you​ are in. So,​ for argument’s sake,​ let’s say taxes stay the​ same. you​ still may be in​ a​ higher tax bracket in​ retirement,​ even if​ you​ have less income. the​ reason why is​ that most people lose tax deduction in​ retirement. the​ biggest deductions,​ such as​ your mortgage interest,​ children,​ and retirement contributions are no longer there to​ deduct. This can cause your taxes to​ go up.

If your income in​ retirement is​ lower than it​ is​ now,​ and you​ saved money for say 20,​ 30,​ 40 years,​ what kind of​ job did you​ do saving for retirement? or​ think about it​ this way,​ how many people want to​ retire to​ a​ significantly reduced standard of​ living? When you​ retire don’t you​ want to​ retire to​ at​ least the​ same standard of​ living you​ are used to? Some even want a​ better standard of​ living. They don’t want to​ sit around the​ house. They want to​ travel or​ go see grandchildren. is​ all that stuff free? in​ addition you​ may have other expenses such as​ health insurance,​ or​ medical expenses. So,​ you​ see,​ you​ lose some expenses like mortgage payments but other expenses take their place. Some may say “Hey,​ I have great health coverage through my employer. It’s part of​ my retirement plan.” if​ that is​ you,​ you​ should go talk to​ some GM and FORD employees and see what is​ happening to​ their health coverage. It’s being changed on​ them whether they like it​ or​ not. Don’t plan on​ things that are not guaranteed.

It gets worse. Did you​ know that with 401(k)s,​ IRAs,​ and other qualified plans,​ the​ IRS will tell you​ how much money you​ have to​ take out at​ age 70 ½? They call this minimum distribution requirements. if​ you​ don’t take out the​ amount they told you​ to,​ they will penalize you​ 50%. if​ you​ withdraw too much money in​ retirement,​ your social security will get taxed. Yes,​ the​ IRS wants to​ tax your social security,​ as​ noted earlier. This is​ a​ big part of​ their revenue. Don’t worry though,​ you​ don’t have to​ pay tax on​ your social security if​ you’ve done everything right.

Fortunately,​ there are congressionally approved methods for receiving retirement income tax-free. This is​ known as​ asset shifting or​ distribution planning. This is​ where I spend most of​ my time. it​ is​ not just how you​ invest that is​ important but where you​ invest. When we get together I will show you​ some creative ideas to​ take what you​ are currently doing and show you​ how you​ can either reduce the​ taxes you​ will pay in​ retirement or​ show you​ how you​ could possibly get your entire retirement tax-free,​ including your social security. in​ summary,​ this means you​ will take advantage of​ today’s low taxes,​ eliminate what is​ called tax-rate risk,​ eliminate the​ minimum distribution problem,​ and receive your social security 100% tax-free.

If you​ or​ someone you​ know needs some help managing retirement assets,​ setting up a​ retirment savings plan,​ or​ have life insurance needs,​ just give me a​ call at​ 801-545-0696.

Mark K. Lund,​ CRFA
Wealth Manager
Stonecreek Wealth Advisors,​ Inc.
10421 So. Jordan Gateway,​ Suite 600
So. Jordan,​ UT 84095
Securities offered through Sammons Securities Company,​ LLC
Member NASD and SIPC

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