Tax updates from D.C.

From Retirement Now Newsletter September 23rd 2021

I came across a good article about some potential tax changes that may be looming on the horizon… with an emphasis on potential.

The bill is still draft legislation. We should expect the Ways and Means Committee, who write tax legislation, to make some changes to it before it’s voted on..

The article is titled “Here’s who would be affected by House Democrats’ potential tax changes.”

And for most Americans the proposed changes aren’t going to affect them. For instance, some of the changes include:

-Increasing the corporate tax rate from 21% to 26.5%

-Top individual tax rate to increase from 37% to 39.6% (earners above $400K single and $450K joint)

-Long-term capital gains tax rate to increase from 20% to 25% (for earners above $400K single and $450K joint

-Limits on high earners from contributing to 401k and individual retirement plans

-Eliminate mega backdoor Roth strategy, which are primarily used by the wealthy

Here are some of my thoughts…

The article said that with these proposed changes it is expected to add over $2 trillion in increased tax revenues over the next decade. Sounds like a lot of money. But it’s spread out over 10 years. For some context, when the federal government’s fiscal year ended in September of 2020, the budget deficit was $3.1 trillion.

That’s in one year.

Having $2 trillion in additional tax revenues spread out over 10 years seems like a drop in the bucket.

Also, the Social Security Trustees report came out recently. It showed that the trust fund is projected to run out in 2033 (last year they projected 2034), at which time current benefits would be completely covered by current taxation, which is only able to cover about 76% of projected benefits.

If it gets to that point the additional funding for benefits would have to come from somewhere. It’s not right to promise people those benefits then take it away when they are most financially vulnerable in retirement.

Not to mention it’d be political suicide to reduce benefits for those currently receiving benefits.

My concern is higher taxes.

Either that, or reduced government spending at some time in the future.

But I’m really concerned about what higher taxes could mean for retirees who have saved inside tax deferred plans, like 401k, IRA, TSP. Every withdrawal from tax-deferred contributions creates taxable income in the year it is withdrawn. If income tax rates have increased this means less after-tax income a retiree gets to keep on every withdrawal. Which will result in lower spending on their lifestyle, or more strain on their portfolio to generate the income they need.

And maybe a combination of both.

Either way for some people taxes may be the single biggest expense they have in retirement, even if nothing changes in the tax code.

Which is why I encourage people to begin thinking about this.

How vulnerable are you to potential tax increases? The bigger your tax-deferred accounts the more vulnerable you are.

Do you believe proposed tax increases years from now will only impact high earners and super wealthy, like how the current proposed legislation appears to be doing? Or do you believe the middle class may start to be impacted in the future?

These are good questions to ask yourself.

And even better to start taking action to help reduce your vulnerability.

Conclusion: No one knows for sure what the future will hold, for tax changes or for anything. But if you’re concerned about your retirement and need to talk with a financial advisor to help give you some answers I’d love to hear from you. CLICK HERE to book a free 20-minute chat with me to discuss.