Retirement Planning

What did the 2018 Tax Reform Accomplish?

Do you wonder why tax reform is such a big topic?  How can we have a tax cut be a positive when the U.S. National Debt (http://usdebtclock.org/) is at $21,478,692,424,196 and counting?  In case you are not used to that many numbers in your accounts, that is almost $21.5 Trillion.  The interest on the debt is more than $313 Billion currently, thanks to low interest rates.  Once rates climb, which is one of the reasons they cannot increase current rates, the interest alone could approach $1 Trillion or more.

Social Security, Medicare/Medicaid and Defense are the 3 most major contributors.  Do you see any of those going down?  I sure don’t!  And there is a huge list of obligations that would simply depress you to think about.  Let us think about our nation’s debt like this…

If you were decreasing the amount of money you make each year, but increasing your spending, you would soon be getting a lot of phone calls from the people you owe money to because you are under-producing your obligations.  The recent solution was print more money.  The biggest problem with that is money is valued because it is hard to attain.  The easier it is to attain, the lower the value.  What happens if China calls in the 1.18 trillion the U.S. owes them.  They own 19% of the $6.2 trillion in Treasury bills, notes and bonds ( https://www.thebalance.com/u-s-debt-to-china-how-much-does-it-own-3306355).

The decrease in the incoming taxes will begin happening as more and more baby boomers enter retirement.  They will no longer pay into Social Security, but will draw large amounts.   The largest push of baby boomers actually begins between the years of 1957-1964, with 1957 being the largest number entering retirement in U.S. history.  So how can we not increase taxes in the midst of a looming problem?  We should be doing that during a strong economic period when we are at relative peaceful times (depending on your view of peaceful times).

The reality is that being a politician became about being liked and their approval rating over doing what is best for our country.  Sounds a lot like social media problems of our current time…

Our country must cut spending or our debt balloon will burst.  We Need Higher Taxes

This has implications for any of us in or near retirement.  For starters, the Tax Reform lasts for 8 years.  That is a good opportunity for us as citizens to take advantage of making some major shifts in our Retirement Income Planning before taxes go back up to what they were before this reform.  They very well may go up even further.  But even if they do not, Congress is going to be forced to make some other tweaks, which will increase your net income now or later.

These adjustments may not be apparent.  Will they increase taxation on Social Security, raise Medicare premiums, and/or count all of Social Security in the provisional income formula?

The impact to you is your taxes during retirement may actually go up, placing less of your Social Security income in your pocket and more in the IRS’s pocket.  That will increase your overall taxation on pensions, IRA withdrawals and other taxable income.  Where will that money come from when you were counting on using it to provide for your needs?  It will most likely have to come from taxable funds, even more so growing your tax liability.

The great news is you have 8 years beginning in 2018 to make some shifts and help lower your tax liability. This is not a way to not pay taxes, but a way to control them.  If I gave you a loan, the first question you would ask is what is the term and interest rate?  If I told you I would decide on a year by year basis what I think the rate should be, would you accept my loan?

That is what we are doing when we keep our fingers crossed for lower tax rates in retirement.  Your CPA and financial advisors need to be talking to you about this.  Having an efficient plan to get yourself into potentially a zero percent tax bracket is vital.  Would you rather pay taxes on a small amount or a larger amount that has compounding interest growth over years and years?  We have been taught to defer taxes on that amount going into a 401(k) year after year, only to see it grow to a huge amount (hopefully!) and then pay whatever tax rates the IRS tells us to when we retire.  They do not tell you that will heavily impact the way your Social Security will be taxed, even more so increasing your tax bill.  These are issues every advisor needs to be addressing with their client.  But they are afraid of doing this because of the complexity and their inability to address taxes efficiently.  They do not want to get caught in the middle of back and forth conversations with you and your CPA.

This lack of dedication to being sure you succeed could lead to hundreds of thousands of dollars or more in yours or families’ pockets, OR the IRS’s.  Be informed and make your decisions based on facts.  The facts are in front of us.  The U.S. has the largest debt problem in the world.  How are they going to make more money to pay off what taxes are failing to cover?

Let me end by stating:  I do not like the idea of paying more taxes!  No one does…

Andy Bowles

Retirement Income Specialist

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