any thoughts on this?
Do Taxes Go Down in Retirement?
Benz: Wonderful. It’s been quite a while since we were in person. We want to discuss this misconception. You say you hear it from so many people about their retirements that they think that their taxes will actually go down, and it does make some intuitive sense because if you’re not working, you have a little bit more control. But can you talk about where people get this idea?
Slott: Well, that’s exactly it. They said, look, Ed. Because I always tell them about doing tax planning. Rates may go up. You may be in a higher rate. “That’s impossible, Ed. Once I don’t have my W-2 anymore, I’ll have less income.”
And I’ll give you a story. I had a client like this, and I was always telling him for years and years. Finally, I’m doing his tax return, and this was for the first full year of retirement. No W-2. So, he is getting ready. He thinks, “Oh, I’m going to get this big refund.” I give him the return. He says, “Ed, how can this be? My income is higher than my best earning years. How can it be?” I said because you never listen to me. That’s why. I’ve been telling him for years. You may think you’re going to be in a lower bracket in retirement, but you keep forgetting about that IRA you had, and you did nothing about it to trim that balance down. So, it was growing and growing and growing. And now, you’re forced to take money out. Now it’s at age 73. It was 70½ a few years back when that happened. But I said, “Now your RMDs are larger, yes, than your largest W-2.”
So, that’s on the income side because if you ignore the growing IRA, that’s a tax bill waiting to happen. And people think, “Oh, if I don’t have my W-2.” But they forget the IRA continues to grow and accrue for the government. That’s on the income side.
But on the deduction side, it’s the same thing. Chances are they don’t have deductions anymore for 401(k) contributions. They don’t get any dependent-related tax benefits. They don’t have little kids anymore. They probably paid off their mortgage, so there are no mortgage interest deductions. And now, under the recent law, they’re probably all taking the new standard deduction, not that new, but the last few years we had the raise. So, the income is higher, and deductions tend to be lower. So, they’re in a higher bracket. It’s not even that it’s a higher bracket. Well, it does go to a higher bracket. But the income from the IRA tends to push them into higher brackets than they were working. And when I talk to advisors and consumers that are in retirement, and I tell them that, they said, “Yes, our income is much higher. We don’t know how, but it’s higher in retirement.” So, I talk about doing the planning, getting that balance down, so in retirement, you can have lower income, maybe with Roth conversions, moving it to tax-free vehicles, and getting it out ahead of time.
https://www.morningstar.com/retirement/ ... ement-myth
Do Taxes Go Down in Retirement?
Benz: Wonderful. It’s been quite a while since we were in person. We want to discuss this misconception. You say you hear it from so many people about their retirements that they think that their taxes will actually go down, and it does make some intuitive sense because if you’re not working, you have a little bit more control. But can you talk about where people get this idea?
Slott: Well, that’s exactly it. They said, look, Ed. Because I always tell them about doing tax planning. Rates may go up. You may be in a higher rate. “That’s impossible, Ed. Once I don’t have my W-2 anymore, I’ll have less income.”
And I’ll give you a story. I had a client like this, and I was always telling him for years and years. Finally, I’m doing his tax return, and this was for the first full year of retirement. No W-2. So, he is getting ready. He thinks, “Oh, I’m going to get this big refund.” I give him the return. He says, “Ed, how can this be? My income is higher than my best earning years. How can it be?” I said because you never listen to me. That’s why. I’ve been telling him for years. You may think you’re going to be in a lower bracket in retirement, but you keep forgetting about that IRA you had, and you did nothing about it to trim that balance down. So, it was growing and growing and growing. And now, you’re forced to take money out. Now it’s at age 73. It was 70½ a few years back when that happened. But I said, “Now your RMDs are larger, yes, than your largest W-2.”
So, that’s on the income side because if you ignore the growing IRA, that’s a tax bill waiting to happen. And people think, “Oh, if I don’t have my W-2.” But they forget the IRA continues to grow and accrue for the government. That’s on the income side.
But on the deduction side, it’s the same thing. Chances are they don’t have deductions anymore for 401(k) contributions. They don’t get any dependent-related tax benefits. They don’t have little kids anymore. They probably paid off their mortgage, so there are no mortgage interest deductions. And now, under the recent law, they’re probably all taking the new standard deduction, not that new, but the last few years we had the raise. So, the income is higher, and deductions tend to be lower. So, they’re in a higher bracket. It’s not even that it’s a higher bracket. Well, it does go to a higher bracket. But the income from the IRA tends to push them into higher brackets than they were working. And when I talk to advisors and consumers that are in retirement, and I tell them that, they said, “Yes, our income is much higher. We don’t know how, but it’s higher in retirement.” So, I talk about doing the planning, getting that balance down, so in retirement, you can have lower income, maybe with Roth conversions, moving it to tax-free vehicles, and getting it out ahead of time.
https://www.morningstar.com/retirement/ ... ement-myth
Statistics: Posted by GrilledSardines — Sat Aug 24, 2024 11:34 am — Replies 9 — Views 587
