Strategies for “Retirement Transition Tax Planning” so, you don’t end up stuck in a higher tax bracket & the “Tax-Free Investment”
Most people believe that when they retire, they will be paying less taxes in retirement. Without the proper planning ahead, you could potentially pay more than.
You don’t want that to happen, do you?
Taxes in retirement can be very different from the taxes that you paid while you were working.
Your accumulation strategy to get to retirement is just as important as your distribution strategy in retirement.
Planning ahead with a tax transition strategy before retirement and before age 701/2 (or 72 depending on when you were born) is critical because there are much fewer tax planning opportunities post age 701/2 (or 72) than ever before.
The years between 50-70 are probably the most critical and here’s why. After age 701/2 Social Security is locked in, your pensions MUST be taken and your RMDs (Required Minimum Distributions) MUST be taken as well. Your RMDs include IRA, Simple IRA, SEP IRA, or other retirement plan accounts.
Even if you are younger than 50 you should be contributing to your Roth 401(k) account or regular Roth.
The problem arrives when you take distributions from these tax deferred accounts. Without careful planning, these stacked distributions could potentially bump you into a higher tax bracket and potentially pay more in taxes along with Social Security and Medicare for the rest of your life. With the new Tax Cuts and Jobs Act (TCJA) a married filing jointly couple in the 12% bracket is $77,400. A couple could potentially exceed that and have to WITHDRAW MORE MONEY to pay those taxes in the bumped 22% tax bracket or higher.
Prior to the retirement years, we have the ability to pick and choose what shows up on your tax return depending on which accounts we withdraw from and timing decisions.
Another good article would be Roth Conversions
The Tax-Free Investment
The tax-free investment that enjoys all of the tax-free qualities of the Roth IRA, without the traditional constraints is a Life Insurance Retirement Plan. Let’s briefly summarize the attributes that make the Life Insurance Retirement Plan an effective tax-free accumulation tool:
a) Access to cash value prior to 59 1⁄2 with no penalty
b) Growth of money does not generate a 1099 tax bill
c) Distributions are taken out tax-free regardless of age
d) No contribution limits like a Roth
e) No income limits
f) No legislative risk
This investment is not just a tax-free accumulation tool, it’s also a hedge against the risk of premature death.
The IRS allows you to contribute nearly unlimited amounts to a Life Insurance Plan, as long as you’re willing to pay for the cost of term insurance out of these contributions.
Let me give you an example, imagine a bucket with a spigot attached to the side of it. You shift dollars into the bucket on an annual basis. In the meantime, the cost of term insurance drips out of the spigot.
Depending on the insurance company you decide to use, this death benefit can also double as long-term care insurance. Many companies that sponsor these investments say that in the event that you can’t perform 2 of the 6 activities of daily living (such as eating, bathing, dressing, etc.), they will give you a portion of the death benefit while you’re alive for the purpose of paying for long-term care. This feature allows individuals to access long-term care coverage without the traditional costs of long-term care insurance.
To really understand how devastating this tax can be, you should speak to a Fiduciary, fee-only advisor and who works with a CPA as well. If you would like to see a general example of all this or would like to see one based on your situation contact us 630-810-9100 or skrase@cgofinancial.com
Until Next Time…
P.S. More Tax Strategies like 7 Key Roth Considerations
