Taxes are a critical consideration in retirement planning. Higher taxes mean less income to spend. While predicting future tax rates is impossible, understanding potential tax changes can help you prepare.
Did Your Tax Bracket Change?
Your federal tax bracket determines the percentage of your income you owe in taxes. During retirement, your tax bracket may change. For example, if a spouse passes away, the surviving spouse changes from filing as married/joint to filing as a single filer, often resulting in higher taxes since single filers are taxed at higher rates on lower amounts of income.
Did Tax Brackets Change?
Even if your filing status remains the same, tax brackets themselves can change when Congress passes new laws. In 2017, the Tax Cuts and Jobs Act temporarily lowered tax bracket rates, but these rates are set to expire in 2025. In 2026, tax rates are slated to return to their previous, higher levels. Planning based on current tax rates means preparing for potential increases starting in 2026.
Were Any Deductions Eliminated?
The amount of your income subject to taxation is crucial. If you earn $100,000 a year and deduct $20,000, you pay taxes on $80,000. If next year you can only deduct $10,000, you pay taxes on $90,000. Even without a change in tax brackets, reduced deductions mean higher taxable income. The 2017 Tax Cuts and Jobs Act eliminated some deductions, and similar changes could occur in the future.
Were There Changes to How Your Assets Were Taxed?
Future tax increases could also come from changes in how retirement assets are taxed. Social Security benefits were not taxable before 1984. Legislation passed in 1983 made up to 50% of the benefits taxable, increasing to 85% in 1993. Congress could further raise the taxable portion of benefits, increasing your tax burden.
Were Any New Taxes Enacted?
Congress may pass new taxes on retirement assets. This possibility was discussed during the debate over President Biden’s proposed Build Back Better agenda, which included new taxes to offset increased government spending. One proposal required a new annual Required Minimum Distribution (RMD) from IRAs and 401(k)s when retirement assets exceed a certain limit. This RMD would force savers to withdraw and pay taxes on 50% of the excess each year, reducing the tax-preferred status of these funds.
How Can You Protect Against These Risks?
“Tax diversification” can be a useful strategy. Including tax-free savings options like Roth IRAs and Roth 401(k)s into your plan can protect against risks. These accounts are funded with after-tax dollars and, if terms are followed, withdrawals in retirement are tax-free. So, if future tax rates rise, these funds may remain unaffected.
Making sure a portion of your retirement funds are in tax-free accounts can protect against the risk of rising taxes and provide a more holistic strategy for managing your retirement money.
Meet with a qualified financial and tax professional to ensure you have a retirement plan that works for you!
Retirement Planning with Ianniello Agency
At Ianniello Agency, we can help you plan for retirement with annuities. Annuities can offer you a steady income in retirement and are tax deferred. To learn more about investing in an annuity, click here.
