“Most people in their working years have a lot of tax deductions: mortgage interest, 401(k) and IRA contributions, exemptions and tax credits for dependent children, and giving to charity, but those deductions often disappear in the retirement years,” says Kory A. Holker, an Accredited Tax Advisor (ATA) and principal of Asset Protection Services, Inc. headquartered in Minneapolis, MN. “Once people hit retirement age, most of those deductions are gone: the mortgage is paid off, the children are grown, and most people donate time instead of money to charity once they retire. So people often end up paying the same amount or more in taxes, even if their gross income is less.”
Understanding how life changes will affect one’s retirement tax burden is an important step toward avoiding sticker shock come tax time post-retirement. Another step is understanding how taxes are structured in the first place. President Donald Trump has recently proposed some changes to the tax structure that, though not without critics, may provide a boon for those saving with an eye toward retirement. Holker notes that the financial world is keeping an eye on the proposed changes—which includes compressing the seven current tax brackets into three and eliminating most itemized deductions, among other adjustments—because “Unfortunately, taxes will very likely be higher in the future so if these cuts pass, it will be important to take advantage of them now and, ideally, pay little or no taxes later.”
Is it really possible to pay no taxes? Not without a good amount of pre-planning. “Those nearing retirement can arrange their retirement savings so that they can take advantage of the zero percent tax bracket post-retirement,” Holker says. “For example, if an individual has the majority of their assets in a Roth IRA, he or she can take distributions out of their traditional 401(k) or IRA accounts and use the standard deduction to eliminate the tax burden.”
These are intricate and often-over-looked maneuvers that can make a big difference and keep more money in people’s pockets and as a part of their legacies. Because retirement planning, tax planning, and other financial planning overlap in key ways, it can be helpful to have a team look at one’s financial situation holistically. “Asset Protection Services is a family business and each of us has a different specialty. That’s really helpful to the client because people don’t just receive one piece of the puzzle but the whole package, total wealth management,” Holker adds. “That’s really what is needed to ensure that one is taking the best advantage of the benefits associated with all the various moving pieces.”
And there are quite a few pieces to the retirement planning puzzle. Aside from taxes, would-be-retirees must also be concerned with Social Security maximization strategies, income planning, and insurance solutions. As well, other considerations that have financial implications include the possibility of needing nursing home or long-term in-home care, estate and final expense planning. Taxes are a common thread running through all of these, as all have various tax implications that are sometimes unduly discounted.
While the proposed tax changes may help certain retirees, a recent Forbes magazine article cites the changes as being potentially harmful—by which they mean resulting in an increased tax burden—to certain segments. These include single taxpayers making between $127,000 and $200,000, single parents claiming head of household, those who claim multiple dependents, and those whose itemized deductions of between $12,000 and $24,000 annually if married filing jointly. As well, the cuts favor the richest 1% with an average of 90% of those making over $734,800 per year receiving a reduction that averages 11% compared with a 1-2% reduction for those in the lowest income brackets.
These considerations have certainly opened the plan to criticism and apprehension. Still, on average, 73% of taxpayers regardless of age or income bracket would save under the proposed changes and that’s a figure most can get behind. Even small savings add up, especially when it comes to saving for retirement when every little bit will count.
Powered by WPeMatico
Latest posts by Brad Bennett (see all)
- Europic Chloride Market Set for Rapid Growth & Trend : 2024 - February 24, 2018
- New Hope for Adoptees Searching for Biological Family - February 24, 2018
- Free People to Open in Palm Springs, California - February 24, 2018