We understand that it's time to reconsider your retirement and estate planning portfolio, as suggested by Kiplinger.com. While you may have accumulated a substantial nest egg through your 401(k), this retirement planning vehicle comes with significant considerations during your golden years. The initial appeal of employer-matched contributions in a 401(k) is undeniable, offering immediate tax advantages as contributions are deducted pre-tax from your paycheck, allowing for yearly compound growth. However, when retirement approaches, the tax implications of 401(k)s, 403(b)s, or traditional IRAs can become particularly challenging.
In our experience with retirement estate planning, we often hear the common belief that retirees will fall into lower tax brackets. However, we've found that the opposite frequently occurs. Your tax rate is likely to increase. Maintaining your current lifestyle requires similar income levels, resulting in comparable tax rates. Moreover, with grown children and a paid-off mortgage, those valuable tax deductions disappear, potentially pushing you into higher tax brackets. In estate and retirement planning, we emphasize that all withdrawals from contribution plans—whether from dividends, capital gains, or your contributions—face taxation at your current income tax rate. With the top marginal rate currently at 37 percent and considering the US deficit, this rate could rise further.
Through our comprehensive retirement planning and estate planning services, we've observed how double taxation can significantly impact retirement savings. This often occurs because retirement plan distributions can increase taxes on your Social Security benefits. Unless you've established a Roth IRA, distributions from retirement plans affect the taxable percentage of your Social Security benefits. This results in higher taxes on both your retirement plan distributions and Social Security income, along with increased taxation on investment earnings.
Estate planning retirement considerations must include Required Minimum Distributions (RMDs), which can be both frustrating and costly if overlooked. The IRS mandates withdrawals from retirement accounts at specific times, regardless of your preference to maintain the funds in the account. These withdrawals become mandatory at age 70½, with substantial penalties—up to an additional 50 percent tax—for failing to take the required distribution.
For married couples, we've found that 401(k)s or IRAs are often the least advantageous accounts to leave to a surviving spouse in estate and retirement planning. While everyone wants to ensure their spouse's financial security after their passing, these fully taxable accounts can create significant challenges. Upon the death of a spouse, the survivor's tax filing status changes from married filing jointly to single, potentially shifting them from the lowest to the highest tax bracket—an outcome that likely wasn't part of your financial planning intentions.
Your retirement and estate planning strategy must account for potential tax law changes affecting your 401(k) and IRA plans. Each Congressional session brings the possibility of increased retirement plan taxation. Given the rapidly growing US national debt, tax increases seem inevitable. The federal government's approach of "privatizing gains while socializing losses" suggests that citizens will face higher taxation as the government seeks to regain financial stability.
We recommend consulting with a tax planning professional to explore more tax-efficient retirement vehicles for your funds. While some conversion strategies may require initial investments, they can significantly reduce your long-term retirement tax obligations and enhance your estate planning retirement outcomes. These strategic moves can protect your hard-earned savings and ensure a more secure financial future.
If you have questions or would like to discuss your personal situation, please don’t hesitate to contact our Brooklyn, New York office by calling (718) 233-2903.
