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Future taxes on retirement assets
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One of my questions when I get involved in a discussion with people about a financial matter, ObamaCare for example, is “Who is going to pay for all of this?” The topic could also be something like local recreation or the new Braves stadium, and my question remains the same.

Math is the universal language and we have some serious negative math concerns at the federal level. Most will agree that our government has a debt now in excess of $20 trillion. Once again, the question arises … Who is going to pay for all of this? I have a suspicion it won’t be Syrian refugees, people in this country illegally, or those who don’t find it necessary to seek gainful employment.

The correct answer is, of course, “us”!

Assuming that we can send people to Washington who can balance their checkbook, the government will have to consider significant tax increases to reduce this debt in the future.

Federal tax rates have fluctuated significantly over the years. My post-WWII baby boom generation saw top rate income tax brackets of 90-plus percent in the late 1940s and through the 1970s, top rates never dropped below 70-percent. This year the Affordable Care Act surtax has pushed the maximum rate to 43.4 percent.

Because a high number of our members of Congress do not grasp the question of who is going to pay for all of this, I would anticipate tax increases in the future.

The majority of my generation’s baby boomers have a lot of their money in qualified retirement plans, so we are definitely at risk in the event of a large tax increase. As an example, had you placed $5,000 yearly into an IRA and your tax bracket was 28% for 30 consecutive years, your tax deduction would total $42,000.

To keep it simple, your IRA has grown to $800,000 and you choose to withdraw $40,000 yearly. At the same tax bracket, your income tax liability will exceed 30 years of tax deductions in four years.

For my generation, the Roth IRA became available in 1998, but many of us had already hit 50. There are contribution limits and phase outs for higher income earners. Beginning this year, Required Minimum Distributions (RMDs) are required at age 70-and-one-half. Even though they are non-taxable, the purpose is to liquidate the account like a traditional IRA.

A Roth IRA conversion could be very attractive, but the arithmetic probably won’t work if you anticipate the same or lower tax bracket at retirement. Paying income taxes in one year on a large conversion will probably be a deal breaker, particularly if the tax has to be paid from the IRA. A Roth will probably perform better over time for younger investors.
As we head into retirement, there are two areas that are near certainty to be a part of your life. The RMD begins in the year you hit 70-and-one-half. You can defer until April 1 of the year after you turn 70-and-one-half, but two distributions will need to be taken.

If you want to see what a high tax bracket is, don’t take the RMD. The automatic penalty is 50 percent of the RMD plus the regular income tax. IRA custodians are very good about notification of an RMD. The IRS will consider waiving the penalty with a convincing reason for failure to take the RMD.

The other priority is to minimize tax on your Social Security benefits. The number of times our elected officials have damaged this system would make for a decent term paper. I’ll summarize by saying up to 85 percent of your Social Security benefits may be taxable at ordinary rates. History shows that these benefits were originally promised to be free of income tax.

Juggling your income, Social Security tax liabilities and deferred interest can be a daunting task. Consider using a fee-only advisor to help your retirement years more pleasant.

Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached at 770-786-2781.