3 Tax traps to avoid in retirement

“You have a silent partner in your IRA and 401K and his name is Uncle Sam.” Kiplinger

Most people have never considered this, but the reality is that your IRA and 401k are joint accounts with the IRS. The dollars you contribute to either of those accounts are dollars that have never been taxed. Ultimately, Uncle Sam will determine how much of that money you keep, and how much he takes.

How and when you withdraw money from those accounts can have a huge impact on the amount of taxes you pay and how much you keep. It is possible you could wind up keeping a smaller percentage than you planned.

Today, tax rates are the lowest they have been in the past 35 years. At the time of this publication, the U.S. government debt is right at $25 trillion dollars and growing daily. At some point, Washington lawmakers are going to need more of your money in taxes, when they do, the money in your IRA and 401k are likely to be included.

There are three big tax traps that are avoidable for anyone thinking about retirement.

Trap #1: Not having a withdrawal strategy

“…if you are not careful, you can ruin a lifetime of successful saving when it comes time to withdraw money from your nest egg…” The Motley Fool.

Saving money in your retirement accounts is easy, money is automatically withdrawn from your paycheck and goes straight into your retirement account. Withdrawing that money from your accounts can be complicated and confusing. Without a defined withdrawal strategy, money you accumulated in those accounts may be clobbered by taxes.

 Trap #2: Not having a strategy for taking required minimum distributions (“RMD”)

“Think of RMDs as the IRS version of WMDs. Weapons of Mass Destruction.” Forbes.

When you turn 72 (as of 2020), you are required to begin taking distributions from your IRA or 401k. In the absence of a plan, RMD’s could inadvertently result in moving you to a higher tax bracket, which means paying more in taxes.  It might also force you to sell certain of your investments at an inopportune time. This could result in less money in your pocket. It is critical for you have a plan for taking a RMD long before you are required to do so.

Trap #3: Failing to prepare for future tax hikes

“Another worry that might not be on everyone’s radar is the likely increase in taxes that could occur as early as next year.” Forbes.

As mentioned earlier, tax rates are currently the lowest that they have been since 1986; at the same time the U.S. government is $25 trillion and growing in debt. Currently, millions of baby boomers are retiring, and it appears likely their IRAs and 401k’s will be subject to increased taxes. It is critical for you to take preventative measures now to insulate your nest egg from higher tax rates. Make a small investment of time now to do some advanced tax planning and save a small fortune in taxes later.

Here to help

Financial & Tax Architects can help you reduce taxes or potentially eliminate them in retirement.  At Financial & Tax Architects, our goal is to provide our clients with a worry-free retirement. We have expert advisors ready to build a plan that will help you reduce or remove taxes from your retirement accounts. Contact us today to schedule a discovery call and find out how we can help you.