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Think Twice Before Saving for Retirement: Uncle Sam Watching You

Think Twice Before Saving for Retirement: Uncle Sam Watching You

By    |   Friday, 21 July 2017 05:50 AM

You probably don’t want to hear this, but old man, Uncle Sam's mouth is watering right about now.

I don’t care what political party you fall into; you’d be hard pressed to meet anyone who hasn’t once complained about the foolishness going on in Washington, D.C., for years now.

Believe it or not, those politicians deserve a little more credit than we’ve given them.

Why? Only because this generation labeled the baby boomers has saved well over $14 trillion dollars in traditional IRAs, 401(k)s, 403(b)s, and other accounts to finance their soon-to-be retirement.

Let’s be conservative and assume an income tax rate of 15 percent, which would mean more than $2 TRILLION in taxes due to the federal government. Not just a couple billion here or there… $2 TRILLION plus.

God Bless America!

The oldest of those amongst the baby boomer generation turned 70 ½ years old as of last year. And this is where the fun begins. You thought you were in control of your money, but now you’re on what I like to call “The Government Plan.”

At this age, Uncle Sam comes knocking for something called an RMD (Required Minimum Distribution), and whether you need this money or not, you’re now forced to withdraw an IRS specified amount of funds from these traditional accounts whether you like it or not. If you don’t take these RMDs correctly you could be subject to the highest penalty in the U.S. tax code; a hefty 50 percent penalty that is.

We live in the greatest country on the planet. However, our system has been constructed in a way that punishes people like you. The system disciplines those who do the right thing and are successful. Those who have amassed wealth through the years could now face higher penalties, fees, and excessive taxes when those who didn’t save a dime likely will be paying far less.

The responsible savers out there could:

  • Pay three times more in Medicare premiums for the same coverage their next-door neighbor is receiving.
  • Pay significantly more in taxes on 50 percent to 85 percent of their Social Security benefits.
  • Be unable to itemize tax deductions.
  • See up to 40 percent of their estate go to Uncle Sam because they don’t have a carefully-crafted strategy when they pass away.

Many Americans will grossly over pay taxes in retirement. But there are the smart and savvy few that will pay far less. The question is, which one will you be?

Here’s how to start:

  • Manage Your Withdrawals: Ensure that your years of savings wind up in different tax designated accounts that can provide you with TRUE tax diversification.
  • Convert to a Roth IRA: Your Roth IRA is not subject to RMD’s and provides tax-free income in your golden years. You must pay the taxes in the year you convert to a Roth IRA. Consult with your Tax Advisor before converting as you could find yourself in a higher tax bracket if you are not cautious.
  • Invest in a QLAC: You can invest up to 25% of your IRA or 401(k) plan (up to $125,000) in a QLAC without having to take required minimum distributions on that money when you turn 70½. Taxes will be due upon the distribution of annuity payments. However, payments can be delayed until age 85.
  • Work past age 70 ½: There is a larger number of baby boomers working longer. If you’re one of them, you are not forced to take required minimum distributions from your current 401(k) at age 70 1/2 if you are employed. This exception doesn’t apply to former employer’s 401(k) plans or traditional IRAs. However, you may be able to get around this issue by rolling those accounts into your current employer’s 401(k), if the company plan allows for it. (Consult with your CPA on other limitations)
  • Donate your RMD with Qualified Charitable Distributions: Once you’re 70 1/2, you can give up to $100,000 from your IRAs to charity, tax-free, every year. The contribution counts as your RMD and won’t be included in your adjusted gross income on the 1040 come April 15th.

Chris Heerlein, author of Money, Won’t Buy Happiness – But Time to Find It, is an Investment Adviser Representative and partner at REAP Financial LLC. He hosts the “Retire Ready” TV and live radio shows in Austin, Texas, and has been featured in national media outlets such as Fortune, Bloomberg Businessweek, and Money magazines. Heerlein also is an ongoing contributor to the financial publication Kiplinger.

REAP Financial Group, LLC is a registered investment advisory firm. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Opinions expressed in this article may change without prior notice. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Investment recommendations may change, and readers are urged to check with their investment counselors before making any investment decisions as all investments involve risk. In accordance with U.S. Treasury regulations, any advice concerning one or more Federal tax issues, it is not a formal legal opinion and may not be used by any person for the avoidance of Federal taxes or tax penalties.

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Those who have amassed wealth through the years could now face higher penalties, fees, and excessive taxes when those who didn’t save a dime likely will be paying far less.
saving, retirement, wealth, penalties
Friday, 21 July 2017 05:50 AM
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