Record budget proposals, policy revisions and tax code reorganizations are just a few examples of the dramatic changes that we have seen in our country so far in 2009.
While it’s yet to be seen the long-term economic impact of such changes, there is one long-term repercussion that you can count on? someone will have to pay for the high price of change, making it inevitable that we will see an increase in taxes in the future.
While the government is working to reduce or eliminate other programs and funding to cover some of these new expenses, the deficit is large and the end consumer may ultimately be asked to help, most likely in the form of a tax increase.
While taxes afford us all that is great about this country, there is nothing patriotic in overpaying taxes.
When it comes to saving for retirement and the retirement accounts used to do so, they can often times be the highest taxed asset owned by an individual.
For most, their retirement savings is earmarked for future needs, whether it’s for next year, five years or not for another 15 years. Although there are several types of accounts utilized for saving, most require retirement savers to pay taxes on money not yet needed.
Retirement monies should be in safer vehicles, however CDs or high interest checking accounts, for example, require taxes to be paid upon maturity or annually, only allowing for simple interest to be earned and often times at a lesser rate than even the rate of inflation.
If you want tax-advantageous savings accounts that allow for safety in principal as well as continued accumulation of wealth, consider these options?
A Roth Conversions. Traditional IRAs are tax deferred savings vehicles, but will eventually require minimum distributions (RMDs) when the policyholder reaches age 70.5.
Some retirees may not need these distributions by this age, but because they are ‘required? to take them, they will experience an increase in income, and subsequently, an increase in their annual income tax liabilities.
Although a Roth conversion will require taxes to be paid on the amount converted from one account type to the other, if done now it will be converted at the current tax rate, eliminating future tax liabilities.
This also allows for continued growth and the forgoing of RMDs, giving the retiree more control of their retirement savings. If taxes are bound to increase in the future, this is a strategy an account holder may want to consider now.
Conversions can happen incrementally, meaning rather than rolling the lump sum at one time and paying taxes on the full account value, roll a portion each year and pay annual taxes on only the amount converted.
Although there are income restrictions in 2009 for a Roth conversion, they are slated to be lifted in 2010.
Fixed Annuities. Retirement savers seeking a tax deferred, yet safe retirement savings vehicles may also want to consider a fixed annuity.
Fixed annuities provide security of principal in an unsecure economy, as they are not directly correlated to market volatility and cannot lose value due to market decline.
Comparably, interest earned on a fixed annuity is tax deferred, which not only reduces income taxes in the years of saving, but also allows for triple compounding interest.
Interest is earned on the principal, the annual interest, and the untaxed gain each year, and then locked in.
Interest earned the following year will be earned on the previous year’s end of year account balance. Fixed annuities allow money earmarked for retirement to grow safely and without tax until accessed or distributed.
Savings vehicles come in a number of different shapes and sizes. Be sure the terms and conditions of the fixed annuity best meet your financial objectives.
In a world of uncertainty, be certain of your finances and retirement future. Evaluate your current investments and long-term objectives.
If substantial tax increases have not been factored into your future retirement or income plan, consider taking advantage of the known tax rate of today, rather than waiting to face the uncertainty of what tomorrow may bring.
David Boike owns Retirement Resources tax, mortgage, and financial consulting practice in Clarkston with his sons, D.J. Boike and Jake Boike. Call 877-732-5751.