At Paraclete Wealth Management, we are committed to helping our clients achieve lives of meaning and purpose. What does that mean? Well, the specifics are different for everyone, but we believe every person’s strategy should include a comprehensive approach to financial planning. Most especially, it means having a retirement plan that takes into account the impact of potentially increasing taxes on your retirement distributions. Why is this so important? Well, to put it simply, there’s a storm brewing that can put your retirement security in jeopardy: taxes are very likely to increase.
In this article, we explain why it’s so important to focus on lowering your tax burden, with the goal of getting to zero. To do so, we share some thoughts from the forward to David McKnight’s book, The Power of Zero, written by Ed Slott, a CPA and author.
How We Know Increasing Taxes are On the Horizon
For many years now, Ed Slott and other industry experts have been warning consumers and financial advisors that the writing is on the wall. The notion of increasing taxes isn’t merely a prediction. Rather, it’s the oncoming result of something much more straightforward: math.
You see, the American government will soon need huge cash infusions to meet its commitments to entitlement programs like Social Security, and it will have no choice but to raise taxes on those of us who have worked hard, sacrificed, saved, and played by the rules. We were told to put money away for retirement in tax-deferred accounts like 401(k)s and IRAs, and many of us did.
Those who saved the most diligently, though, will soon realize that a substantial chunk of those tax-deferred retirement savings are sitting ducks for a revenue-hungry Uncle Sam. In fact, as your 401(k) or IRA funds grow, so does the government’s share, since it is a partner in your savings. But unlike a traditional business partner, Uncle Sam can increase his partnership percentage of your tax-deferred savings whenever he needs more money, and that day is coming soon.
Are You Prepared for Increasing Taxes?
The question becomes, “Are you prepared?” You can be, but unfortunately, for most people the answer is “no,” because they believe that there is no way this can happen to them.
But it can – and it likely will. We have had federal income tax rates exceeding 90%. In fact, from 1936 to 1981, the top federal income tax rate never went below 70%! Higher taxes, of course, mean less money for your retirement years.
Even if you think you are prepared for increasing taxes with a plan, it is unlikely that you are. In fact, in most cases, the kind of planning you need to do now to avoid the oncoming “tax disaster train” is not being done.
If you have to wonder if you have a plan to reduce your income taxes now and in the future, then you do not have a plan. If you don’t have a plan, you will end up with “The Government Plan.” As you can imagine, that is not the plan that is best for you.
The plan that you need must be implemented by you and be done as soon as possible, before the “tax train wreck” arrives.
You need to create a plan to move your tax-deferred funds from accounts that are forever being taxed to accounts that are never taxed. Your best defense is offense—to build tax-free savings that cannot be threatened by increasing taxes.
The good news is that right now we are in the lowest tax rates in recent history. Now is the time to strike in order to create tax-free income for your retirement years and beyond. Even your loved ones can benefit from the planning you do now. The tax code actually includes several tax moves you can make to create tax-free retirement income, but few people take advantage of them. For example, Roth IRAs and life insurance alone can help you and your family end up with more money than you have now, and with more of it tax-free.
The Time to Act is Now
There will never be a more cost-effective time to leverage your current assets into tax-free assets. As you move your tax-deferred funds to tax-free territory, you reduce the impact of future tax hikes on your retirement savings.
By following the principles in The Power of Zero – which I have built my wealth management practice on – you can access a road map of how to get to the 0% tax bracket, virtually eliminating the tax risk, which, if not addressed, will easily consume a solid portion of your retirement savings.
How Paraclete Wealth Management Can Help
We have always believed strongly that knowledge is powerful – and empowering. We hope this article has been eye-opening and that you’re thinking about whether you have a plan to combat increasing taxes. If you’re interested in learning more about how you can get closer to zero tax liability in retirement and you’re not yet a client of Paraclete Wealth Management, please reach out to schedule a complimentary strategy session today. We look forward to hearing from you!
