Everyone has an opinion about taxes and depending on who you talk to, you will hear rumors about raising taxes, cutting taxes, or increasing taxes for the wealthy. One thing that most retirement planning professionals agree upon, though, is that taxes will most likely be going up in the future.
Why Do Taxes Go Up?
Simply put, taxes fund government spending and the more the government does, the more taxes are needed. With our aging population accessing Social Security and Medicare, government programs like Obamacare and federally subsidized student loans, as well as interest on our ever-growing national debt, our government is going to need more money in the future. The Heritage Foundation states that at current tax rates and expenditure levels, tax revenues will be entirely consumed by 2030. (1) This will necessitate tax rate hikes in the very near future.
Tax Rates And History
Tax rates are currently at an all-time low. Throughout most of the last century, tax rates have been much higher than what we see now. In 1945, at the end of World War II, the highest tax bracket was 94%. However, tax rates stayed elevated, with a top rate of 70% the norm well into the 1980s. Compared to that, our current 39.6% is incredibly low, which is why we can expect tax increases to come our way.
How Can You Prepare For A Tax Hike?
Because we don’t know how much change is coming, it can be a challenge to know how to protect our assets from an increase. Keep in mind that while you should take steps to prepare for a tax increase, you shouldn’t make financial decisions based solely on avoiding taxes. But there are several strategic options you can take to reduce the effects of a future tax hike.
Have a Plan in Place
Don’t wait until the laws change to set a plan in motion. Be proactive, examining multiple areas of your financial life to see where tax increases may affect you. Then work with your financial advisor to find strategies to minimize their impact. This way, when changes come, the uncertainty won’t cause you undue stress and worry.
Max Out After-Tax Accounts
When you contribute to your pre-tax retirement accounts, you save income tax right away. Unfortunately, that means you’ll pay taxes on the money when you withdraw it. While your income may be less when you are retired and draw on those savings, taxes may also be even higher at that time.
A smart choice is to invest in a Roth IRA to achieve tax-free growth, which allows the taxpayer to prepay taxes and lock in current rates. This will shield you from future tax rate increases. One caveat: if the tax system changes and new taxes are added, such as a consumption tax, then the Roth tax vehicle does not protect against them.
Look At The Whole Picture
You may also want to consider your legacy and think about what your family will inherit from you. The value of your investments and other assets could go up quite a bit as time goes on, which may result in hefty estate taxes. If you create your financial plan keeping taxes in mind, you can ensure your family inherits as much as possible.
Contribute To A Health Savings Account
Medical expenditures are inevitable, even if you are healthy. Most insurance plans include high deductibles so even routine appointments and care can cost you. A Health Savings Account (HSA) lets you put pre-tax funds aside. As a bonus, you won’t pay taxes when you withdraw the money for qualified medical expenses.
Reevaluate Your Investments
You want your investments to grow, but some mutual funds do a better job than others when it comes to tax efficiency. Some tax-efficient options for you are index mutual funds and exchange-traded funds (ETFs). As taxes increase, make it a priority to focus on tax-efficient returns increases for your investments.
Invest In Municipal Bonds
Municipal bonds are tax-free investments that will ensure your income will not be affected if tax rates increase. While these bonds may not bring in as much income as taxable bonds, they offer more protection against tax hikes.
How We Can Help
We don’t know when or how much tax rates will change, but in light of the recent election and historic tax rates, it would be wise to review your portfolio to see if it is prepared to weather a tax rate hike. An experienced financial professional can easily identify any weaknesses in your portfolio and recommend any improvements that should be made.
Find out how you can help protect all your assets today, in retirement and for your family’s future. To learn more, download our free report, 12 Keys to a Successful Retirement Strategy today. If you need help, call my office at 770.249.7424 or email me today at firstname.lastname@example.org.