Tax Reform – Look Further Ahead
You may never be taxed at a lower rate than now. To continue to put all of your retirement savings in to tax-deferred accounts is to squander a big opportunity to maximize wealth.
Hello again and thank you for reading.
As you know the President has signed H.R.1 Tax Cuts and Jobs Act in to law which, among other things, has lowered the income tax rates for many Americans and large number of businesses. Despite the potentially huge cost from a deficit standpoint, we also expect to see additional spending in the form of some sort of infrastructure bill in 2018 and this is in addition to defense spending increases.These moves are, in fact, bold. The bet that is being made is that with huge tax and investment stimuli, America will turn back in to a “growth” economy and produce at levels high enough to simultaneously close our tremendous deficits. Collectively, we hope this all works out that way.
How does this impact retirement investing?
Currently, the Gross National Debt is approaching $20 Trillion and most experts believe that these massive tax breaks along with surges in new spending for infrastructure and new government programs will cause this number to continue to increase. The tax bill alone is estimated to add $1.7 Trillion to the debt over 10 years. So, what does this mean for the average person who is investing for a future retirement? The answer is, that unless we can work our way to reducing the debt rather than having it continually increase, the government will be forced to increase your taxes in the future. Further, this means that your tax rate in retirement may very well be considerably higher in the future than it is today. And for those who have all their eggs in the tax-deferred retirement savings account buckets (IRA, 401k, 403b etc.) your retirement savings could be devastated by higher tax rates later on. And, we can’t forget that a majority of the individual income tax reductions in this bill are only temporary, expiring on December 31st, 2025.
Tax Diversification
Qualified tax-deferred accounts, like 401ks and traditional IRAs, allow you to take tax deductions now but, in retirement, you have to pay taxes on withdrawals at your full income tax rate. In the event your income tax rates (federal & state) are higher than they are today, your deferral strategy will have backfired. Another problem with having taxable income in retirement is that your Social Security / Medicare benefits are means tested and therefore can be taxed if your income exceeds certain thresholds. The truth is that no one can predict, with certainty. what their future tax rates will be. But, based on the likelihoods described above, efforts should be made to diversify the vehicles in which your investments are held so that you can benefit from tax free withdrawals.
What you can do now:
- If you work for a large employer, see if they offer a ROTH 401K. If they do, invest a portion of your retirement funds in the ROTH.
- If you qualify, invest in a ROTH IRA.
- If you do not have access to a ROTH 401K and are unable to qualify for a ROTH IRA, or if you just want to have more tax free cash available in retirement, look in to an overfunded, cash value life insurance policy. Our ROTH Emulator design mirrors the tax advantages found in a ROTH IRA while maximizing flexibility as your needs may change over time.
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Steve Levy
Direct Line: 914-214-5757
email: steve.levy@conciergeinsure.com
web: www.conciergeinsure.com
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