A new study confirms what we experience in client meeting rooms. Americans are increasingly worried about how taxes will impact their retirement.
The Quarterly Market Perceptions Study, conducted by the Allianz Center for Future Retirement, found that 70% of Americans worry about taxes on their income in retirement.
70% worry that higher taxes in the future will impact their retirement income from tax-deferred accounts such as a 401k or IRA.
The worries were largest among Generation X. That generation is usually defined as those born between 1965 and 1980. A whopping 80% worry that higher taxes will impact their retirement income.
The study also found that financial advisors should take note of the concern. 62% of those surveyed said they would stop using their current financial professional if they did NOT help them navigate the current tax environment strategically.
401(k) and IRA Withdrawal Tax Risks Explained
Tax planning is key to your retirement income plan. First, you can’t avoid taxes. Withdrawals from your tax-deferred accounts like 401ks and IRAs will be taxed as ordinary income, meaning those withdrawals will be stacked on top of any other income you receive in retirement. Controlling those withdrawals is important. Taking out too much at once, or during the course of the calendar year, could cause you to jump into a higher tax bracket.
It could also cause your Medicare premiums to go up. Many people don’t realize that your Medicare premiums are determined by your income. Jumping one tax bracket could increase premiums for a couple by more than $2,000 annually. Jumping two brackets, could more than double your premiums.
Required Minimum Distributions and Future Tax Burden
At the same time, it doesn’t make sense to avoid withdrawals on your tax-deferred accounts either. For Generation X, Required Minimum Distributions, which are mandated withdrawals from your retirement accounts, won’t kick in until age 75. For someone who retires at 65 with $1 million, they could potentially have twice that by the time they are required to make withdrawals. RMD’s could force you into a higher tax bracket.
Roth Conversions and Tax-Free Retirement Income Strategy
What does make sense is to create, with a financial advisor, a withdrawal strategy that mixes different taxable accounts with tax-free accounts. Explore opportunities for Roth conversions. That allows you to convert pre-tax dollars in IRAs into a Roth IRA, setting you up with more tax-free income later in retirement.
*Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. (22-LPL)
Retirement Tax Planning Strategy: Don’t Go It Alone
Bottom line – if your one of the millions of American worried about taxes wrecking your retirement, don’t go it alone. Find an advisor who will help you build a retirement income plan and tax strategy that will help you live the retirement lifestyle you want.
Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.
