Tax Apocalypse In Your Retirement Account

pearlbrown | May 31, 2012 | 2,276 posts since 2010

Amid all the gloom and doom about forced retirement, skyrocketing healthcare costs and nest egg-cracking financial markets, there's yet another threat facing baby boomers: future tax liabilities.

With the prospect of rising tax rates after the Bush tax cuts expire, some retirees could find themselves paying even more in taxes than they did when they were working. Optimizing retirement withdrawals to minimize taxes can result in up to 33 percent more to spend in retirement years than ignoring the impact of taxes. Read more

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Bozo | Jun 1, 2012 | 177 posts since 2011

From a practical standpoint, seems doubtful politicians will allow a wholesale reversion. Nobody wants to be blamed for the gridlock. That said, eventually the piper must be paid, and all our taxes will go up. My best guess is that folks in the lower brackets (poor folks, retirees, and such) will see little change,

me1004 | Jun 1, 2012 | 534 posts since 2010

There is plenty of talk about that. But if they want, the can lock in the current tax rates any time. All they have to do is convert to a ROTH and pay the tax now, rather when they withdraw later. And they NEVER have to start withdrawing from a ROTH, whereas with a traditional IRA, they have to start withdrawing, and paying the tax, by age 70.

But Bozo is right. What has been proposed in the past is to preserve the current tax rates for people below a certain income level, I think of a few hundred thousand a year.

paoli2 | Jun 1, 2012 | 2,195 posts since 2011

Thanks for sharing the article Pearl. Isn't it real considerate of the government to make sure they help so many of us fall into lesser tax brackets by these low interest rates we are getting. One thing for sure, we won't have a lot of interest income to pay taxes on or to add to our total income and have to pay more taxes on our social security. We have to look hard to find "anything" good about all this since there is so much bad in what is happening to savers.

pearlbrown | Jun 1, 2012 | 2,276 posts since 2010

me1004, I have been converting a certain portion of my IRA to a Roth for a number of years and paying the tax now for exactly those reasons: locking in the current tax rates and also minimizing the forced RMDs at 70 1/2. I plan to have the conversions finished well before then, especially with the balance getting smaller by the day thanks to the miserable stock market performance.

Even if, as Bozo suggests, folks in the lower tax brackets will get a break if there are revisions in the future, I wouldn't bet that the government will take pity on the poor retirees. They certainly haven't so far.