Where do you think tax rates are going in the future?
I don’t think I’ve ever spoken with somebody who thinks that tax rates will be going down, and I would agree with them.
Have you seen https://usdebtclock.org/ recently? It shows the total amount of the national debt in real time, but more fascinating to me shows the total amount of the unfunded liabilities that the government has when it considers both Medicare and Social Security.
Although the US national debt stands at $20 trillion plus, the total amount of unfunded liabilities is greater than $123 trillion. Yes, with the “t”.
The national debt is not decreasing. There’s no sign that there is a solution to reducing this amount anytime soon. There’s no evidence that Washington has a plan to solve this growing gap or to even reduce their own spending.
The day of reckoning will eventually come. The question is, is the likely solution for Washington to reduce its spending, or to increase taxes? I think you the answer.
The former Comptroller General of the US, David Walker, has stated that tax rates will have to double in order to bridge this growing gap. David Walker was basically the CPA for the government and knows all the numbers.
How does this affect us?
If your retirement plan is built upon having a certain amount of money each month with a predictable amount of tax liability, what happens if your tax rate doubles? If you want the same lifestyle, you’ll need to take more money out of your investment accounts. Taking more money out of your investment accounts means running out of money sooner. So this is a serious issue.
What can we do now (in light of having historically low tax rates) with impending tax raises in the future?
Every year, we must evaluate whether there is more money we can take out of our taxable IRA accounts in order to fill up the low tax rate brackets still available to us. We seek to fully liquidate IRA accounts by the time that tax brackets go up. It is very important to fully fill up the 10% federal and 12% federal bracket. Even using up to 22% federal bracket can make sense for some.
There is a perfect amount of money to have in retirement accounts so that increased tax rates will not negatively affect you.
The amount will depend on the person and tax situation, but you want enough money in your qualified accounts so that once you reach the age of 70 and 1/2 and enter Required Minimum Distribution territory that the RMD amounts do not exceed the standard deduction available to you. In this way none of the RMD will be taxed since will be absorbed by the standard deduction.
Find out your magic number at the following link:
If you can get into the 0% tax bracket, then you don’t have to worry about tax rates doubling. 0% X 2 will always equal 0.
If you have any questions please feel free to contact me