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Your IRA: The Good, The Bad, The Ugly

| June 10, 2019
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Somewhere along the way, someone probably gave you the advice to sock money away into an IRA, 401(k) or some other retirement savings vehicle. The conversation may have gone something like this:

You: “How can I get my taxes down?” 

Someone: “Contribute more to your retirement account.”

That sounds great—plain, simple, and easy. But now that most of us have followed that advice for years, the good may not look so good after all. Why?

Just because you avoided taxes on the front end, doesn’t mean you avoided taxes altogether. You or your family will still pay them. And odds are your retirement accounts have grown over the years. You won’t just pay tax on what you put in; you’ll pay on the whole enchilada. We call this a ticking tax bomb.

Congress is working hot and heavy on a bill to change a few, critical features of these IRAs. Currently, you are forced to start taking money out of your IRA and pay taxes on these monies at age 70 ½. One of Congress’ proposals is to raise this to age 72. Could be great, but the flip side is Congress will have to pay for the lowered tax revenue it will cause. And they will—probably many times over.

One large benefit to an IRA is that when you die, your heirs have options. One is to spread the distributions from the inherited IRA over their lifetime. This is incredibly helpful to mitigate income taxes. However, Congress is proposing to limit this “stretch” to ten years. So, a million-dollar IRA would generate around one hundred thousand dollars of taxable income for ten years. Ouch!

If you want to teach your children about taxes—eat a third of their ice cream! — Author Unknown. This certainly applies to IRAs. An even worse thought is what the tax rates will be at the time they inherit your IRAs.

So, if you aren’t worried about your kids, do you care about your spouse?

Have you heard of the widow’s penalty? There is a major tax advantage to being married. When you die, the amount your spouse takes from your IRA may not change, but the amount of tax on that distribution can certainly go up—especially when it affects the amount of Social Security that is taxed.

Now you know the good and the bad. So what about the ugly? That is up to you. Not doing anything is doing something. The result could be ugly. In many cases we are finding Tax Reform has created a perfect storm for some serious tax planning. Unwiring this tax bomb can be very complex, but it can be done. Don’t wait for the bomb to explode—there won’t be a way to turn back. Let us help you today.

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