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Rising taxes in retirement is an important
risk for the tax-conscious to understand. This is especially true for individuals
who have saved all or most of their retirement assets in tax-deferred
vehicles, like IRAs and 401(k)s. These popular savings vehicles defer taxes
into the future. If taxes are higher in retirement than they are today,
people with IRAs and 401(k) plans could pay more in taxes than planned.
That’s because in a rising tax environment, a larger portion of your IRA or
401(k) withdrawals could go to the IRS. Some savers are concerned about
higher taxes in retirement since higher taxes pose one of the greatest risks
to traditional tax-deferred savings vehicles.
Will my taxes
be lower, the same, or higher in retirement?
“It is not possible to predict the future,
however, there are four ways that your taxes could potentially rise in
retirement,” Jim says. “It may be important for you to understand these
factors and consider whether they could potentially impact your retirement
strategy.”
Four Ways
Your Taxes Could Rise in Retirement:
1. You Change Tax Brackets
– Your marginal tax rate determines the percentage of your income you will
owe in taxes. Some savers may not maintain the same marginal tax rate
throughout retirement. One reason for a tax rate change in retirement is when
a spouse passes away and the surviving spouse moves from filing married/joint
to filing as a single filer. Single filer bracket rates are applied to
significantly less income than joint filer rates, so the total amount of
taxes you pay could go up, as more of your income is subject to higher
bracket rates.
2. Tax Brackets Change Around
You – Even if your filing status stays the same throughout
retirement, tax brackets could change around you. This occurs when Congress
passes new laws impacting tax brackets. For example, in 2017, Congress passed
and the President signed into law comprehensive tax reform, sometimes
referred to as the Trump Tax Cuts. This legislation temporarily lowered tax
bracket rates for many Americans, but this law and its lower bracket rates
will expire in December 2025. Absent Congressional action, beginning January
2026, tax bracket rates will revert back to their previously higher levels.
If you are evaluating your retirement strategy based on today’s tax rates,
it’s important to remember those rates could likely be higher starting in
2026, even if your income remains the same.
3. Deductions Are Eliminated
– Tax brackets are only one factor that can potentially impact your
taxes in retirement. The amount of your income subject to taxation is another
way that you could possibly pay more taxes in retirement than planned. If you
earn $100,000 annually and can deduct $20,000, you likely pay taxes on
$80,000 of taxable income. If next year you can only deduct $10,000, you
would pay taxes on $90,000 of taxable income instead. Your bracket didn’t
change, but you ended up paying more in taxes because more of your income was
subject to taxation due to deduction changes.
4. The Way Assets Are Taxed
Changes – You could also end up paying more taxes in the future if
Congress changes the way retirement assets are taxed. One example of this
could be Social Security. Before 1984, Social Security benefits were
non-taxable. Based on legislation passed in 1983, up to 50%of Social Security
payments became taxable, and in 1993, that amount was raised to 85%. Congress
could potentially pass new legislation making an even higher amount of the
benefit taxable for some retirees. If that happened, you could pay more in
taxes because more of your retirement income would be subject to
taxation.
Evaluating
Tax-Free Strategies
Tax diversification is a valuable option to
consider. Some savers choose to address these risks in retirement by incorporating
tax-free strategies into their retirement approaches. Tax-free assets can
serve as a hedge against rising taxes in the future. Since Roth IRAs, Roth
401(k)s and other tax-free savings vehicles are funded with after-tax
dollars, no taxes are due on the funds when they are withdrawn in retirement.
That means if Congress raises taxes in the future, these funds would not be
impacted. By ensuring a portion of your retirement funds are in tax-free
accounts, you may feel better protected against the potential risk of rising
taxes in retirement.
What Action
Could You Take Today to Help Protect Yourself from Tax and Legislative
Risks?
Could your potential tax bill in retirement
be bigger than you think? You could find out in 30 seconds. Jim invites you
to click the QR code to generate a complimentary Retirement Tax Bill analysis
to view your potential taxes in retirement. “Once you’ve seen your numbers,
let’s talk,” Jim says. “I look forward to speaking with you. Together, we can
discover what’s going on in your current planning and if that is the optimal
path for you.”
Jim Sloan is
a 24-year financial advisor and six-time author that designs tax-conscious
retirement strategies for baby boomers. Investment advisory services offered
only by duly registered individuals through MariPau Wealth Management, LLC.
Insurance products offered by Jim Sloan & Associates, LLC. Jim Sloan
& Associates, LLC and Maripau Wealth Management are not affiliated
entities, and do not offer legal or tax advice.
Contact
2002 Timberloch Place
Suite 625
The Woodlands, Texas 77380
