Retirement Tax Bomb

Hey welcome to this segment on: Is your retirement portfolio creating a tax bomb. Let’s start by defining what a tax bomb is. That’s a situation where you end up going into a higher tax bracket where proper planning could have otherwise avoided it. Let’s talk about how that might… how your portfolio might create a tax bomb. Well, a lot of times it happens in those tax-deferred accounts, those 401(k)s. How does your tax burden increase? Well, think about your contributions to those 401(k)s, think about the company match, think about the earnings. You know, if these go over multiple years, those balances can grow to significant amounts and so then at age 72, you know right now the law states the government says, hey you have to take a required minimum distribution. And those required minimum distributions can have some negative tax bomb effects. One of them would be the Medicare surcharges, otherwise known are IRMAA, income related monthly adjustment amount. Basically, they make you pay more in taxes through your Part B and you Part D if you make too much money. The next thing that might create a tax bomb is from a spousal plan. You know, if you’re married and one spouse dies, you go from that married tax bracket to the single tax bracket. Those amounts change and likely income doesn’t drop off a lot of times. And so now your surviving spouse is going to be pushed up a tax bracket. Maybe at that point in your life you have successful kids, your heirs are doing well, and right now there is a ten year rule. So when you pass away, your tax-deferred accounts have ten years to get distributed. That income goes on top of their income. And so if you think about it from that standpoint, your money might be going from maybe the 12% bracket to the 22% bracket. That’s a big jump. And so, if you’re following your account tax dollars, that would be an example of a tax bomb. Hey, what are some strategies that we might be able to diffuse this tax bomb. I think you should research and see. Maybe we start earlier with Roth 401(k) contributions or maybe you have a Roth 457 or a Roth 403(b) as an option. So you’re participating in your employer plan. You’re getting the match, but you’re starting your tax diversification at an earlier stage because you put a plan in place. Maybe your health care plan has a health savings account attached to it and you can contribute to that health savings account. Maybe you’re on a family plan and then you can double you know, a married couple can double that contribution. You start saving in an account that will go with you, tax-free on the way in, tax-free on the way out, as long as it’s used for health care purposes. That’s a great tax planning tool. Maybe you want to look at tax bracket optimization. Do you have any room left in your bracket. What are you feeling about taxes? If you feel they are going to go up later, then you’re going to want to have plan, you’re going to want to know where you sit in your tax bracket compared to what the tax brackets have been in the past. And maybe the last one is life insurance, okay. You know, we use life insurance as a tax planning tool all the time. So if you’re sitting there and you’re uncomfortable with what your lack of planning might be, then please feel free to give us a call, no obligation, opportunity to just help us give you a red flag review on your tax planning.