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Carefully Watch What You’re Doing Today; You May Unwittingly be Increasing Your Future Tax Rate

by Samuel N. Asare

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As a financial professional specializing in retirement planning for years, I have noticed and regularly warned investors against what I consider to be the all-time most unassuming yet potentially deadly form of financial suicide.

Investors fund qualified plans like 401(k)s and 403(b)s, postponing their income tax liabilities until they withdraw those funds at retirement or are forced to withdraw them by “required minimum distribution” rules. The idea – or rather, their hope – is that by the time their retirement comes around, they will require significantly lower incomes because their mortgages will have been paid off and their children will have left the nest. This will definitely put them into a lower tax bracket – won’t it?

In reality however, these two activities that people often assume will lead to a lower tax rate actually eliminate two significant tax breaks enjoyed by most Americans:

1. mortgage interest deduction (under section 163 of the Internal Revenue Code) and

2. dependent exemptions.

And also, since they are no longer making qualified contributions into their 401(k)s, their taxable incomes are no longer being reduced.

Hence most retirees receive an unpleasant, surprising lesson in “Real Life Taxes 101,” which even most so-called financial professionals are not aware of: it is possible – and happens more often than not – to have a significantly reduced total retirement income yet still have the same or even a greater taxable income. And it’s your taxable income that matters when it comes to paying taxes. So when folks no longer have mortgage or dependent deductions, they get clobbered with taxes.

Another fact that seems to completely elude most Americans during their retirement planning is that tax rates, both now and in the future, are legislated by Congress. And those rates may change anytime. In fact, most experts – as well as ordinary Americans – strongly believe that tax rates are likely to trend upward, given the current fiscal plight of our federal and state governments.

Here’s the Million-Dollar Question

Is delaying paying your taxes until the time when you are likely to have little to no deductions and/or exemptions a good idea? Based on what we see on an almost daily basis in our consultations with the numerous retirees we help deal with this issue – and good old common-sense – for the most part, it is not a wise idea.

A quick example will suffice. Let’s assume Barry and Bernice are earning $150,000 per year. They have two kids, contribute the maximum $44,000 to their 401(k)s, and pay a deductible mortgage interest of $12,000 per year. They would have a “taxable income” of $79,200 ($150,000, less the $44,000 401(k) contribution, less 12,000 for the mortgage interest, and less $3,700 each for 4 exemptions – two for themselves and the other two for their kids – totaling $14,800 in personal exemptions). Based on 2011 thresholds, their tax liability would be approximately $12,050.

Now, let’s fast forward to their retirement: the kids are out of the nest – hurray!; their mortgage is paid off – finally!; and they are living on only 70 percent of their pre-retirement income, or $105,000. This is just like the doctor ordered, right? Lower income, come their retirement. Okay, now let’s hold all other things constant and assume that the 2011 tax rates are still in effect – all indications point to increased future rates, which should make our point all the more compelling. This couple’s taxable income would be $83,700 ($105,000, less two personal exemptions of $7,400, less $11,600 in standard deduction, less an additional $2,300 for being over age 65), generating an approximate tax liability of – get this – $13,175! Really? Yes, really!

What’s more, notice also that since the IRS considers money from 401(k)-type plans as “portfolio income,” that income counts toward computation of “provisional income,” which may well expose up to 85 percent of Barry and Bernice’s Social Security checks to taxation, as well. If you’re already retired or have heard retirees wondering whose retirements they were really planning, this may well be part of their dilemma.

We believe people just like you should strategically convert their qualified funds – with minimal or no tax consequences – into a nonqualified and completely tax-free environment so you don’t have to worry about future tax rates or the possibility of paying further taxes on your Social Security benefits. Those already in retirement can employ simple, practical strategies toward that end.

For your complimentary consultation, please call us at (877) 656-9111 or visit

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This website is for informational purposes only. All opinions expressed are solely those of Laser Financial Group, LC., and our editorial staff. The information is not to be construed as any form of professional advice, nor as solicitation for the purchase or sale of any security, whatsoever. No particular outcome is guaranteed. No strategy can guarantee a profit, protect against loses, or ensure peace of mind. Recommendations are based solely on third party insurance products for which we receive compensation. Laser Financial Group, LC, does not provide investment advisory services. This does not constitute an offer to provide services in any jurisdiction in which such offer or solicitation would be unlawful under the laws of such jurisdiction. Any United States tax reference on this website is not intended to be used, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code, or promoting or recommending to another party anything addressed herein.

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