A recent article by David McKnight looks at the proposed tax cuts by President Trump and how those cuts will impact retirement planning. First, how will Trump get his tax cuts through Congress when he has a simple majority, but he does not have the three-fifths vote he needs to get any legislation passed which does not have democratic support? McKnight believes Trump will use budget reconciliation.
Reconciliation allows Congress to pass certain legislation related to the budget in an expedited manner with a simple majority vote in both the Senate and the House. However, there is one major downside to using budget reconciliation to get your tax cuts through Congress — the changes expire in 10 years. At the end of 10 years, taxes revert to current levels. President Bush’s tax cuts in 2003 were passed using this expedited simply majority process.
Getting into the Zero Percent Tax Bracket for Retirement Income
One of the goals of retirement planning is to ensure that you have sufficient income during retirement to sustain the standard of living you desire. As part of that goal, you want to minimize taxes on retirement income as much as possible to increase the money you have during retirement. The ultimate goal for tax purposes is to be in a 0% tax bracket during retirement. To accomplish this goal, you need to have your retirement funds in a tax-free account.
For many people, their retirement savings are in tax-deferred accounts such as 401k accounts and traditional IRAs. While you do not pay taxes on income transferred to tax-deferred retirement accounts, when you withdraw funds from these accounts during retirement, you must pay taxes on the withdrawals. With a tax-deferred retirement account, you are simply postponing paying taxes on the income.
On the other hand, after-tax retirement accounts do not give you the immediate benefit of a tax break when you fund the account, but after-tax retirement accounts do have the benefit of becoming tax-free income during retirement. Roth IRAs, after-tax investment accounts, and insurance annuities can provide a reliable source of tax-free income during retirement. Therefore, many people have a mixture of both types of accounts in your retirement portfolio.
How Can Trump’s Tax Cuts Help You Get Closer to a Zero Percent Tax Bracket During Retirement?
McKnight points out that even though the proposed tax cuts may end after ten years, ten years is a sufficient time frame to implement a plan for zero-tax retirement income. If Trump’s tax plan does cut taxes for many people, contributing to an after-tax retirement account becomes less expensive because you will be paying less in taxes on your earned income.
Even though you will be paying a reduced amount of tax on the income you invest in after-tax retirement accounts, it is still taxable income. However, what you must remember is that each dollar deposited to an after-tax retirement account becomes tax-free income during retirement. Therefore, when the tax cuts end, you will be much closer to a zero-tax retirement plan. It would be well worth the sacrifice to take advantage of lower taxes to achieve a zero-tax retirement plan.
Retirement Planning with The Elder Care Firm of Christopher J. Berry, CELA
Retirement planning is essential for providing for your future. Because the tax laws and investment laws continue to change, it is important to work with an experienced Michigan retirement planning attorney to develop a strategic plan that will achieve your goals for retirement.
For more information about zero-percent retirement plans or to schedule an appointment with a Michigan retirement planning attorney, call our office at 888-390-4360 or use the contact form on our website.
Source: “Trump Tax Cuts and Tax-Free Retirement Planning.” David McKnight. ThinkAdvisor. October 13, 2017.