Defense Wins Championships
As the old football adage states “Offense sells tickets, but defense wins championships.” This concept also holds true in the realm of retirement planning. Retirement savers often make the mistake of focusing too much attention on their account’s investment returns while giving little attention to tax planning.
Ed Slott, CPA, IRA distribution expert, and tax adviser, cautions that IRAs represent a "ticking tax time-bomb," emphasizing that "taxes could be the biggest expense you have for the rest of your life, especially if you have a large IRA. (1)” Tax-deferred accounts such as IRAs, 401(k)s, and 403(b)s are great retirement savings tools, however, if you’ve accumulated a large amount in these accounts it doesn’t come without a large future tax bill.
Here are some reasons you may want to consider implementing a tax planning strategy:
Anticipated Tax Increases Post-2025.
Following the expiration of the Tax Cuts and Jobs Act of 2017, at the end of 2025, tax rates are slated to return to higher pre-2018 levels unless new legislation intervenes. This potential increase could affect all taxpayers, underscoring the risk of deferring your tax bill (2).
Mitigating Future Required Minimum Distributions (RMDs).
The IRS sets limits on how long you can defer taxes on retirement accounts. Withdrawals from these accounts, which start penalty-free at age 59 ½, are taxed as ordinary income. However, many investors delay withdrawals until RMDs kick in at age 73 (3).
As contributions grow, so does the looming tax liability, which could lead to higher RMDs and, consequently, additional Medicare surcharges, impacting premiums for Part B and D—potentially costing thousands annually.
Reducing Tax Burden for Your Heirs.
Previously, beneficiaries could extend taxable distributions from an inherited IRA across their lifetime. However, the 2019 SECURE Act now requires most non-spouse beneficiaries to deplete the inherited IRA within ten years of the original owner's death. This change could impose a significant tax burden on your heirs, especially if they are still in their peak earning years and subject to state income taxes.
In another blog, we’ll explore strategies to minimize the tax impact on your retirement savings, ensuring you're playing the best defense for your financial future.
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Please read important disclosures here.
1. Slot, Ed. “Ed Slott Interview: The Benefits of Roth IRAs.” Forbes Advisor, Forbes.com, www.forbes.com/advisor/retirement/ed-slott-interview-roth-ira/. Accessed [February 6, 2024].
2. Pechter, Ken. “Avoid Paying Higher Taxes in 2026: What You Can Do Now.” Kiplinger, www.kiplinger.com/taxes/avoid-paying-higher-taxes-in-2026-what-you-can-do-now. Accessed [February 6th, 2024]
3. “Retirement Plan and IRA Required Minimum Distributions FAQs.” Internal Revenue Service, www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs. Accessed [February 6, 2024].
