Tax Planning

So many are so worried about saving enough for retirement that they totally ignore the tax consequences.  No, not today's tax bill but that when they retire.

We know today that federal income tax rates are low by historical standards.  With the federal deficit at $14 trillion and climbing, will tax rates still be low when you retire?  Who can say?  Still, managing your tax bill in retirement should be a key issue.  If your financial planner has not gone over this with you in detail, you better find out why not!

Tax Buckets

Consider the various "tax buckets" that are now in effect.  Ordinary income such as your salary, pensions, IRA distributions and CD interest are all considered Ordinary Income and is taxed at your highest tax bracket.  There is no mercy here.  The problem is that most people put as much into their 401(k) and IRA without considering the alternatives.

Other tax buckets exist such as the 15% long-term capital gains bucket and the TAX FREE or Tax Exempted bucket.  The trick is establishing investments in all three buckets so that when you are retired, you can harvest the income you require while not paying an arm and a leg in taxes.

HOW IT STANDS TODAY

If you are married and file jointly, your tax bracket stays in the 15% level up to $69,000.  Considering the standard deduction and personal exemptions, your adjusted income can be in the upper $80s before you move into the 25% tax bracket. That's not bad, you might think.  My pension will be this much and my social security will be this much and I can stay under the 25% tax bracket.  But this is short-sighted. What could happen?

What if you or your spouse dies?  What happens then to your taxes?  You now find yourself a single taxpayer.  Your tax brackets change considerably!

Now you move into the 25% tax bracket at $34,500.  Your standard deduction is less and you lose an exemption.  

Given the same income stream as before, your tax burden may now be $10,000 more!  

OTHER EVENTS

Only after the fact do you hear people talk about it.  Once you reach 70 1/2, you are required to take minimum distributions from your IRAs.  Required! Even though you might not need the money.  This could easily kick you up into a higher tax bracket or possibly disqualify you from senior freeze and other benefits that have maximum income requirements.  Without pre-planning, there is little you can do but pay for the mistakes of lack of planning.

And, it's probably not unlikely to believe that tax rates will be higher in the next 10 to 20 years.  There is evidence that in the next ten years, the federal deficit will only continue to increase.

With proper planning today, you will have a much better chance of beating the tax man when you retire.