Would You Put Your Money In “This” Account For Your Retirement?
By: Michael D. Reese, CFP®
Imagine I came to you with the following account for your retirement planning:
- Whenever you withdraw money, it will be taxed at your highest tax rate.
- Distributions from this account will likely also create additional tax on your Social Security Income, thus leading to double taxation.
- From a tax perspective, it would be the worst possible account to leave to your surviving spouse (surviving spouses become single tax payers, and thus are taxed at higher rates).
- It would be the ONLY account you have which forces you to withdraw money, even if you do not want to.
What do you think? Great deal, huh?
Obviously, if I framed the account in that manner, you would likely tell me to take a hike! However, what you may not realize is that I’ve just described the features of a 401k, 403b, 457, IRA, SIMPLE IRA, SEP IRA, and the like.
Standard retirement planning advice is for you to put as much money as possible in tax-deferred accounts while you are working. The idea is that you should be in a lower tax bracket when you retire.
The only problem with this line of thinking is that most people want to retire at the same standard of living that they had before they retired. This leads to needing about the same amount of income, which means your tax liability may not go down.
In the real world, it is very common that your taxes not only do not go down during retirement, they often go up. Why? Fewer deductions (no children and house may be paid for), but the same income.
When you retire with a large percentage of your retirement savings in tax-deferred accounts, you are often, unwittingly, creating significant tax exposure for your retirement years.
It is vital that you visit with your financial advisor to gain insight on how you can best address the future taxation of your retirement accounts. And if your financial advisor says, “I don’t deal with taxes” or “you need to talk to your accountant”, then you may want to consider finding another advisor who can help you with all areas of your retirement planning.
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