You May Pay Higher Tax Rates During Retirement Than Now

taxes in retirement

It is more often than not that you were told that it is better to contribute the max amount possible into your 401(k) so that you can take advantage of the employer matching and ride the market increases while receiving tax breaks, so that you can pay those taxes at a lower rate when in retirement. After all, you’ll be in a lower tax bracket, right? So you’ll have lower tax rates, right? This may definitely not be the case.

 

It is highly likely with the way that our national debt is continuously rising; the rate of taxes will only do the same. If that is so, you will want to make sure you do something about it now rather than getting hit with high tax payments when you make withdrawals from your retirement portfolio during your senior years.

Many believe that taxes are very high currently, but it can definitely be higher. They were higher before now. This year, the highest rate is 37 percent for those that have a taxable income of over $510,000. For those that are doing things jointly, the amount would be $612,350. Can you believe that back in ‘44, the top rate was 94% for those that earned more than $200,000 a year? The highest rate did not fall under 40% until the mid to late ’80s.

Compared to the past, our current rate doesn’t seem so bad, right? However, this may change as the current rates will expire on the last day of 2025.

With the way things are looking, the rates may just be higher.

The U.S. has about 22 trillion dollars in debt right now, and it’s only going up and up and up and up. Many economic and financial experts believe that the only way to bring down this number is for the government to receive more money. And a country’s general way of doing that is by taxing its citizens.

A significant portion of the nation’s federal budget is used to support and fund different social benefits such as Medicaid, Medicare, and Social Security. These programs are financed by taxes that are not enough to cover the expenses. In the future, either taxes will be hiked to afford these programs, or the government will pull the plugs on them.

Another thing to look out for is that all baby boomers will be 65 years of age or older by the year 2030. It is expected that about 18 percent of the country will be at least 65. This means that as more people are heading into retirement, more people will be electing for benefits from these social programs like Medicare and Social Security.

For some, you will just go ahead and continue on with contributing as you have always done until it is time to pack up and leave for retirement.

However, for those of you that want to know what you can do to minimize or even possibly eliminate the income taxes that are awaiting you in the future, there are some tips below.

The first step is to compile a list of all of the investments you have. You will then want to categorize these investments into three tax types, which are: always taxed (accounts such as brokerage, CDs, and more); taxed later (includes traditional IRAs, 401(k)s, and 403(b)s); and never taxed (such as municipal bonds and Roth IRAs).

The goal for most investors is to move the funds from the always taxed and taxed later category to the never taxed category. It will be best to get that done before 2025 when the new tax rates will be introduced.

However, always remember that the best financial plan has to be based on your financial needs and circumstances.

One thing may want to consider is to convert your 401(k) or traditional IRA into a Roth, which would have your pay the taxes on the amount with the current rates, and then allowing your money to grow tax-free along with being able to withdraw money from it in the future without having to pay taxes.

This can be done all in one go, or you can move the money over throughout a few years to lessen the tax blow

Another thing you can do is to pull funds from your tax-deferred savings plan and purchase a cash value life insurance policy. This policy allows you to take out loans with subject to taxes. But it’s not as simple as it may sound. It is recommended that you seek guidance from a financial expert that can help you.

Remember, the current tax rates will end by 2025, so if you are worried about facing taxes (probably at higher rates) in the future, be sure to act now on moving your savings into the taxed-never category.

taxes in retirement

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