The following is the final reason in my three part series as to why I believe we will be paying more taxes down the road:
Eliminated Tax Breaks:
The IRS today gives tax breaks in the form of Deductions and Exemptions to name a few. As we get older and our kids (our exemptions) leave home, we lose these tax breaks. In addition, when we eventually pay off our mortgage, the Mortgage Interest Deduction also goes away. By eliminating these tax breaks and maintaining the current lifestyle, our Taxable Income will greater than in previous years. Herein lies the potential to pay more taxes than we did previously. Also, in all probability, we will no longer be contributing to Qualified Plans. These contributions use to help reduce the amount of income on which taxes were due. The flip side of this is that one might say that we no longer have to earn the extra income to set aside these funds for a Qualified Plan. The reality of the situation is, however, at age 70 ½, Required Minimum Distributions (RMD) must be taken from these plans (except Roth IRAs). This means that whether we want to take a distribution or not, we will have to or we will incur a 50% penalty. This, one way or another, has the potential to increase the taxes that will be due during Retirement.
The following is the second reason and Part 2 of why I know inevitably we will be paying higher taxes in the future:
Inflation has been averaging around 3% per year for the past couple of decades. The Rule of 72 says that whatever interest rate your money is earning, divide that into 72 and that will tell you how long it will take for your money to double. Dividing the Inflation rate of 3% into 72 equals 24. That means that in approximately 24 years, the $1 price of an item will double and consequently cost $2. That may not seem like a lot. However, for someone in their twenties, an automobile that costs $20,000 today may cost $40,000 (24 years from now) when they are in their forties. Around the time they are 70, this automobile could very well cost them $80,000! Yes, that is 4 times today’s cost. Their actual income will therefore probably have to be approximately 4 times what it is today just to maintain today’s lifestyle tomorrow. And, someone in their twenties today typically has fewer expenses than someone in their thirties or forties. Translated, more income equals a higher (income) tax bracket!!!
Stay tune for the final reason in this three part blog.
There are three reasons why I believe that we ALL will be paying more taxes in the future. As such, I have created a three part series of blogs to reflect my reasons as to why I know there will be higher taxes tomorrow. The following is Part 1:
U.S. Debt Burden:
America is currently in serious debt. The largest debt EVER in the country’s history! In order to reduce this debt, one of two things have to happen: 1) Reduce spending (by cutting Social programs), and/or 2) Increase revenues (in the form of taxation). It is unlikely that the United States Government will reduce spending on such hot topics as Social Security, Medicare and Medicaid. It is far more likely that they will increase taxes (revenues) instead as this is the “path of least resistance”. The government has not currently undertaken the increase of taxes because of the recent poor health of the economy. Raising taxes just when things are starting to pick up would be counter-productive for the politicians. However, when we are on a strong footing again, the chances of higher taxes in order to reduce the size of the debt are greatly increased!
There’s a reason why CPA Ed Slott, the nation’s leading tax expert (featured on one of the videos in the Resource section of this website), says that taxes are the biggest risk you’ll face in retirement. The reason is in order to cover the skyrocketing debt and obligations like Social Security and Medicare, tax rates must double in order to pay for these benefits. David M Walker, former Comptroller General for the US Government Accountability Office, was recently quoted as saying “based on the current fiscal path, future tax rates will have to double or our country could go bankrupt.”
This means we must be looking for ways to create wealth that is essentially tax free for when we want to use it down the road. This way we don’t get hit with a huge tax bill by deferring taxes until retirement.
There are three main ways you can grow your money tax advantaged (or tax free) to build a tax free retirement income:
The 1st is Municipal Bonds. They’re a form of Government bonds. The good news is that when done properly, they generally grow tax-free, giving you tax-free interest. The downside is they typically offer a low rate-of-return. There are 2 battles we have to win: taxes and rate of return. With bonds you may be winning the tax battle, but not the rate-of-return battle! Also, with multiple municipalities going bankrupt, these may not be as secure as they used to be.
The 2nd option is a Roth IRA or Roth 401K . The good news is that they grow tax-free and you can potentially pull the money out tax-free. The downsides are:
1.) You are restricted on how much you can contribute based on your age and income: Age 49 and under – $5,500. Age 50 and over – $6,500. In addition, if your income exceeds certain limits ($191,000), you can’t contribute at all!!!
2.) For both the Roth IRA and the Roth 401K you have to wait until you’re 59 ½ to take out any earnings. If you take your earnings out before, there could be taxes and penalties. Plus ….this is an IRA/401K. Guess who’s in charge of its rules? The Government!
3.) In order to qualify for money from the Government for college, Medicaid, Medicare and Social Security benefits, one might have to spend down their ROTH to get it. So the Government gives us an advantage in one area, but then takes it away in other areas to make up for it.
The 3rd option is found in IRS Code 7702. This strategy gives you tax deferred growth, and tax free access to your money…whenever you want it. There are no limits on contributions and no government rules on when you can access your money.
It’s a preferred strategy of the wealthy. In fact, 55% of the owners of this type of asset are the wealthiest 10% in the country. The good news is that virtually anyone can use it, regardless of your wealth level. To find out more about this strategy, check out the Resources section on this website. If you want to discuss the strategy, call me or drop me an email so we can set up a time to meet!