How to Beat the Retirement Tax Bomb

Hey, welcome to this segment on how to beat the retirement tax bomb. When people come into our office, it is easy a lot of times for them to understand their investment risk. They watch the News. They watch the fluctuating values in their accounts. They can understand it and they can feel that. But one risk that they don’t always identify easily is what is called the tax risk. You know how tax diversified are your portfolios? So you know let’s first start this with defining what is a tax bomb? A tax bomb could be considered an event or something that happens in life that forces you to go up to the next tax bracket. That proper strategic planning in the years prior could have helped to avoid. For example, your loving your retirement. You get to age 72, all of a sudden the government threw an RMD and is saying you need to take this money out of those tax-deferred accounts and you go from the 12% tax bracket to the 22% tax bracket. That would be an example of a tax bomb. How do you avoid those? What are some strategies? There’s a lot, but I’m going to start with some facts. If you were to look at the history of taxes right now, we are actually over the last 100 years in a historically low tax environment. We also have to take into consideration that through the Corona virus the federal government, you know, pushed out over $3T. And so the question I think that you should really answer to yourself would be, where do you think taxes are going? If you think taxes are going down, maybe you don’t have to have a lot of action items. Maybe you don’t have a lot tax risk at that point. But if you feel like taxes are going up, then I think you’re going to want to identify some numbers in your own portfolio and figure out a tax plan to help mitigate the tax time bomb that might be ticking. So here’s a quick little activity. Just go to all your tax-deferred accounts. Add up all of the money that you have in your 401K, traditional IRAs, SEP, simple IRAs. All of those tax-deferred accounts and just get a number. And then right next to that number go to your Roth IRA or your Roth 401K. Add up all the money that you’ve saved in those tax-free bucket and compare the two. And you’ll be able to see how tax diversified you are. You’ll also be able to see how much tax risk you might have. You know when clients come in, it is common for us to see you know, over 75% of the entire retirement savings in these tax-deferred accounts. So we get to immediately say, it’s time to strategize. It’s time to figure out how to defuse that ticking time tax bomb that’s in their portfolios. It’s the best part of our job. We run mock tax returns. And we have a team member on our staff that does an incredible job of predicting and showing those different tax opportunities each tax year. It’s not something it’s a one time and you’re done. It’s something that has to happen year in and year out. We identify the tax opportunities. We look at the different strategies. Roth IRA conversions is a very common one that we use. And so what we’re trying to do is minimize or be tax efficient with our clients. So if you are at all curious about hey, am I candidate for Roth conversions? There is a lot that you’re going to want to know about those. And they are very individualized. They have to be personalized. There’s way too many variables that go into these instruments in order for them to, for you to understand if it’s the right fit for you. So feel free to give us a call and we would love to sit down and help you plan to retire well.