Taxes Might Become Your Greatest Retirement Risk Guarding your retirement years from the looming tax risk.

Synopsis: ?In an era where growing government debt is pointing towards the likelihood of inevitable tax increases, preserving your retirement takes on new urgency. The vision you have for your retirement years — whether it’s exploring new destinations, indulging in long-held passions, or ticking items off your bucket list — depends greatly on how effectively you manage potential taxation of your nest egg. To help ensure you not only weather the anticipated post-2025 tax changes when the current Tax Cuts and Jobs Act is set to expire, but also prosper, it's important to consider adopting a forward-thinking stance in tax planning. This means not only potentially minimizing your present tax burden but also preparing for potential future tax escalations.

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10 Thought-provoking questions:

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1.????? How might our nation’s growing debt problem affect future tax rates, and what can individuals do now to prepare for any change?

2.????? What are the potential financial implications for retirees if the 2017 Tax Cuts and Jobs Act provisions expire in 2026 as scheduled?

3.????? How might Required Minimum Distributions (RMDs) from retirement accounts impact your tax situation as you age?

4.????? What strategies can you employ to help minimize the taxation of your Social Security benefits in retirement?

5.????? How do long-term capital gains taxes differ from ordinary income taxes, and what does that mean for your investment strategy?

6.????? With the possibility of tax rates increasing, how important is tax diversification in your retirement planning?

7.????? How could a large Roth conversion negatively affect your Medicare Part B and D premiums?

8.????? What steps can you take now to help mitigate the risk of higher tax rates affecting your retirement income?

9.????? What considerations might you make when assessing the tax-efficiency of your retirement income sources?

10.? How can proactive tax planning today lead to a more confident financial future in retirement?

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Today’s topic centers around something that’s as certain as sunrise – taxes. But not just any taxes, we'll be discussing the possible surge in taxes that could affect our retirement years. Now, you might be wondering, 'Why should I be concerned about taxes in retirement now?' Well, let's unpack some up-to-date news that might just have us all paying a bit more attention to Uncle Sam's ledger. Picture this: the debt load of our nation – it's ballooning faster than we've seen in recent history. To put it in perspective, the U.S. debt has surged by $1 trillion nearly every 100 days. Think about that. Every 100 days, a trillion dollars is added to the tab. We crossed the $34 trillion mark on January 4th, after a brief touch on December 29th last year, according to the Treasury Department. Before this sprint, it took about eight months to make a similar leap. It's a pace that's not just unprecedented; it's unsustainable without some changes. Eventually, we must begin to address this colossal debt, or we face the risk of a financial problem potentially more severe than any we have seen before.

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Eventually, the tax bill will come due – and if it hits during a time when we're supposed to be enjoying retirement a lifetime of work can potentially be at risk. But there are strategies that can help you prepare.

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It’s not just about the numbers; it’s about what they mean for our future. And while this topic is serious, our goal is to equip you, not to alarm you. Knowledge is power, and understanding how these figures can influence our retirement plans is the first step in preserving our finances. Today, we delve into strategies to help protect your nest egg from the tax man’s growing appetite.

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·???????? Rising Debt

o?? Let’s take a moment to break down the future financial landscape as it stands, especially when it comes to the growing cost of the U.S. national debt. The Congressional Budget Office, which is like the nation’s accountant, has some startling numbers for us. They tell us that we’re on a track that simply can’t keep going — our national expenses are outgrowing our wallet, primarily due to the rising cost of interest on the debt we already have.

o?? Think of it like this: back in 2023, the interest alone on our national debt was $659 billion. To put that in perspective, that’s more money than what we spend on many other government programs. But that’s not where it stops. It’s expected to shoot up to $870 billion in 2024. That’s a 32% hike from the previous year, and it’s been following a pattern — with similar big jumps in the years before.

o?? This isn’t just a fluke; it’s a growing trend. Over the next ten years, the U.S. is projected to spend a staggering $12.4 trillion just on interest payments. That’s more than double what we spent in the last two decades. Now, these trillions we’re talking about are mind-boggling, but let’s try to make sense of it. That $12.4 trillion we’re projected to spend on interest. It works out to about $37,100 for every person in the country.

o?? Why does this matter for you and me? Because as these interest payments become the biggest expense in our federal budget — yes, even surpassing what we spend on massive programs like Medicare and Social Security — it puts a squeeze on our ability to fund other essential services and investments for the future. It’s like a snowball rolling downhill, growing bigger and faster as it goes, and it’s packed with our tax dollars.

·???????? Expiring Tax Cuts

o?? As it stands, we’re on a countdown to 2026 when the current tax landscape is set to change. That’s when the 2017 Tax Cuts and Jobs Act is scheduled to sunset. Unless Congress steps in to extend those cuts, many of us — and not just the wealthiest — are likely going to see a noticeable uptick in income tax rates and estate taxes.

o?? Now, it's natural to hope that these tax cuts might be extended, giving us all a bit of a reprieve. But here's the rub: the same Congressional Budget Office that's been ringing the alarm bells about our debt also tells us that extending these tax cuts would only dig us deeper into the hole.

o?? Considering everything we've discussed; it seems prudent to approach retirement planning with the assumption that tax rates could increase significantly in the future. With this in mind, exploring strategies that offer some preservation against this likely scenario would be a wise move.

·???????? The Tax Basics

o?? Let's start with the basics. Your retirement income can come from various sources: Social Security, pensions, retirement accounts like 401(k)s and IRAs, and perhaps other investments. Each of these sources is taxed differently.

o?? For example, consider Social Security. Many people think of Social Security as a tax-free retirement benefit, but that's not always the case. Whether or not your Social Security benefits are taxable depends on your "combined income," which is your adjusted gross income plus nontaxable interest and half of your Social Security benefits. If that total exceeds certain thresholds, you could be taxed on up to 85% of your Social Security benefits.

o?? Then there are capital gains. These are the profits from the sale of an asset — like stocks, bonds, or real estate — and they're taxed differently than ordinary income. If you've held the asset for more than a year, it's considered a long-term capital gain, which typically enjoys lower tax rates than short-term gains or regular income. The rate you'll pay depends on your taxable income, but it's usually more favorable than the rates for ordinary income.

o?? But here's a common issue many retirees face: a lot of retirement savings are parked in tax-deferred accounts like traditional IRAs and 401(k)s. While these accounts are great for growing your nest egg without paying taxes on the gains each year, eventually, when you retire and start taking money out, every dollar you withdraw is taxed at your regular income tax rate. And remember, if tax rates go up in the future, the amount of money you'll owe on those distributions could jump significantly.

o?? Understanding the tax treatment of various retirement income sources is essential. With thoughtful planning, you can potentially reduce the taxes you'll owe, keep more of your Social Security benefits, and have greater control over your income in retirement. It's about creating a balance that works for your individual financial situation and being prepared for the tax changes that lie ahead.

·???????? Potential Tax Pitfalls

o?? Imagine this: you've saved diligently, but as you start withdrawing funds, you realize a substantial chunk goes to taxes. That's a pitfall we want to avoid.

o?? One issue that can easily lead to tax pitfalls for many retirees is Required Minimum Distributions, commonly known as RMDs. These RMDs are mandatory withdrawals that the government requires you to take from your tax-deferred retirement accounts, like your traditional IRA or 401(k) once you reach a certain age. Now, while these withdrawals are a necessary part of retirement planning, they can also lead to an unexpected tax burden.

o?? Here’s why RMDs can be tricky: they're taxed as ordinary income. So, when you start taking these distributions, they can increase your total taxable income for the year. This increase might bump you up into a higher tax bracket, which means you could end up paying more in taxes than you anticipated. It's like filling up a water balloon. As you fill the balloon with water — in this case, your taxable income — it expands. Fill it just right, and you can manage it without any problems. But if you continue to fill it without caution, pushing the capacity with more water than it can manage — much like crossing into a higher tax bracket — you risk the balloon bursting, leaving you with a bigger mess, or in financial terms, a larger-than-expected tax bill.

o?? Many people concerned about these tax implications are advised to consider converting their traditional IRA into a Roth IRA, where withdrawals are tax-free in retirement. It sounds like a smart move, and it can depend on your situation and goals, but it’s not without its own set of pitfalls.

o?? Converting to a Roth IRA does mean paying taxes on the converted amount in the year of the conversion. If you convert a large sum, you could inadvertently catapult yourself into a higher tax bracket for that year, facing a substantial tax bill. If you convert an amount that pushes your income into a higher tax bracket, you’re now paying more tax not just on the converted amount, but potentially on other income as well.

o?? Furthermore, a large Roth conversion can have a domino effect on the taxation of your Social Security benefits. Normally, if your income is below a certain level, your Social Security may not be taxable at all, or only partially so. However, the extra income from a Roth conversion could make up to 85% of your Social Security benefits taxable. It’s like turning up the volume on your stereo; a little can be fine but turn ’t up too high and it can become unpleasant.

o?? Then there’s the issue with Medicare premiums. These premiums are based on your income. If a Roth conversion increases your reported income for the year, you could find yourself paying higher Medicare Part B and D premiums, a situation that’s akin to getting an unexpected and unwelcome bill in the mail.

o?? So, what’s the solution? Like any good strategy, moderation and planning are key. Instead of converting large amounts at once, you might consider a series of smaller conversions over several years to spread out the tax impact. This can keep you in a lower tax bracket and avoid triggering increased taxes on Social Security benefits and higher Medicare premiums.

o?? By carefully timing these conversions and keeping a close eye on the thresholds of your current tax bracket, you can effectively manage the potential pitfalls. This approach requires a good understanding of the tax code and your financial situation, or the guidance of a knowledgeable advisor.

o?? Remember, the goal isn’t just to avoid taxes now, but to manage them in such a way that you pay the least amount of tax over your entire retirement period. It’s a balancing act — keeping one foot in the present and one eye on the future.

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Our firm is passionate about taxes because of all the financial risks we face, this is one that we find is often ignored in retirement planning. Don’t wait until the tax rates climb to start planning. Proactive tax planning today could help save you a significant amount of money down the line. It's all about making strategic moves now that will help position you to navigate the future tax environment more confidently. So, let's make the most of the current tax laws and set ourselves up for a steadier financial future, regardless of what 2026 brings our way.

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Let's set up a time to chart a course that’s tailored for you. Remember, even pennies in taxes that can be saved today could become many additional dollars available for retirement in years ahead. Give us a call at 800-516-5861 to schedule your complimentary consultation. Or find us online at www.thrivefinancialservices.com , where you can learn more about how we can assist you in building a tax-efficient retirement plan.