The Biden administration has already spent $1.9 trillion on COVID relief and has plans to spend trillions more on infrastructure projects, Medicaid expansion, education, and climate investments. In order to fund these projects, the administration has proposed several tax-increasing measures on corporations and individuals. You may think you won’t have to worry as much about your tax burden in retirement, but you could be wrong. You may need to prepare for taxes on your retirement accounts.
How Are Distributions Taxed?
Distributions from traditional retirement accounts such as IRAs, 401(k)s, 403(b), 457, and Thrift Savings plans are taxed as ordinary income. If you plan on getting most of your retirement income from these sources, keep in mind that it can potentially affect your tax burden in retirement. Also, remember that at age 72, you will most likely be required to take minimum withdrawals from your tax-deferred retirement accounts. RMD amounts are set by the IRS and may force you to withdraw more than you normally would in one year. This could mean an increased tax burden.
What About Inherited Retirement Accounts?
The SECURE Act recently eliminated the “stretch IRA,” which allowed IRA beneficiaries to take RMDs based on their life expectancy. This allowed beneficiaries more flexibility when taking distributions and allowed more time for tax-deferred growth. Now, instead of taking RMDs over their own lifetimes, most non-spouse beneficiaries must drain inherited IRAs within 10 years. This could mean missing out on years of tax-deferred growth, plus a potentially higher tax burden for those who inherit large accounts. There are some exceptions: Spouses, disabled individuals, and those less than 10 years younger than the original account owner do not have to drain the account within 10 years.
What Can You Do to Prepare?
Plan for the tax rates of the future, not the present. Rather than waiting to pay more in taxes on your retirement income, you may be able to take steps to help reduce your tax burden for the long term. Tax minimization strategies could include converting part or all of a traditional tax-deferred retirement account to a Roth IRA, working with a financial planning professional when selling property, funding a tax-advantaged annuity, and exploring the tax advantages of leveraging a life insurance policy.
We understand that taxes could be your biggest expense in retirement and want to work with you to help minimize them. Tax and income planning are important parts of your retirement strategy, and these elements need to work together in one comprehensive plan. To start exploring tax minimization strategies in retirement, sign up for a complimentary financial review with us!
Investment advice is offered through APO Financial Services, LLC. Insurance and fixed annuity products are offered through our affiliates, Asset Protect One, Inc. and/or APO Financial Services, Inc. No persons associated with APO or its affiliates is a licensed attorney or tax professional and nothing on this Page should be considered tax or legal advice.
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