The US legislature is required to raise revenue for bridges, armies, and social safety nets. The budget changes and the need for more income seem obvious. The tax code creates a rule book attempting to uncover the necessary revenue to run our country. Bear in mind that all tax policy changes stem from the current political agenda regarding social policy. Politic control changes; thus, the tax code changes.
In 35 years of participating in the financial services industry, I have seen no more significant interruption of financial journeys for those who believed they were adequately prepared than IRS changes and general misunderstandings of taxation.
You deserve the retirement you earned. That may sound harsh and confusing, but the notion that you get what you paid for applies to retirement. Or at least it should. Assuming you worked hard, saved adequately, invested diligently, and stayed focused on creating income streams to replace your desired standard of living, you deserve to pat yourself on the back and enjoy the retirement you earned.
A missing component to many retirement strategies is dealing with the certainty of tax code changes. The changes can come in the direction of new legislation or from events in your life’s journey. We may not be able to control – though I believe we can partially predict – future IRS changes; we can understand and take advantage of changes that will likely occur in our lives. Regardless of the change source, the impact on your “earned” retirement can be frustrating, if not devastating.
Income variability from year to year and marital status are the two most likely occurrences in your financial future. The tax code is built around a system of increasing stair steps referred to as marginal rates. The more income you have, the higher you go on the steps. Each of us starts on the lowest step, and then we work our way higher. Being married increases the depth or the amount taxed at each level.
When you separate from the workforce, your income will likely be reduced, and your marginal tax bracket may decrease. “May” is the operative word. Our experience has witnessed the most common retiree surprise: their tax bracket has not been reduced. Upon losing a spouse, the marginal rate often increased beyond what they earned while working.
The most significant income variability for the average family is the year they leave the workforce and the year they are forced to take RMDs or Required Minimum Distributions. Each year, the percentage you’re required to withdraw rises. If your assets increased, your income followed suit because the account was more significant than the previous year’s distribution. But your taxable income also went up. The RMD adds to Social Security taxation, potentially Medicare Part B premiums, and even limits some itemized deductions.
The swiftest change in your marginal rate comes from a change in marital status. This may not change your income, but it will change the size of your stairsteps! Make sure tax planning gets the proper attention in your financial journey.
The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.