One of the original tenets of having a traditional IRA or 401(k) held that you would likely be in a lower tax bracket when you retired than during your working years.
That is no longer axiomatic. Most people are finding themselves in as high as or higher tax bracket when they retire than they were when they were working full-time. Why? There are two main reasons:
1) Most people no longer have the tax deduction and exemptions when they retire that they had when they were working. For example, many retirees have paid off their mortgage, they no longer have other dependents in the household, and they are no longer contributing tax-deductible or pre-tax money into IRAs and 401(k)s. So even if they are receiving less income during retirement than when they were working, they are in just as high of a tax bracket because their taxable income didn't go down.
2) Tax rates have been going up and will likely continue to go up by at least 10 percent during the next decade to cover huge federal deficits.If you're over age 59.5, don't make the mistake of thinking that continuing to postpone paying tax on your IRAs or 401(k)s to age 72 is smart. You'll likely end up regretting that you didn't get the tax hit over with sooner (at today's lower rates) rather than later (at higher rates).
Because your current tax bracket will likely be the lowest bracket you will ever be in, you should consider converting your IRAs and 401(k)s to better plans by doing what I call "a strategic roll-out" a method of taking care of taxes now on those accounts at a lower rate and repositioning the money into vehicles that will accumulate free of tax from this point forward and even more importantly, will provide tax-free income later.
Time magazine recently published an article entitled, Why It's Time to Retire the 401(k) . It stated, "The ugly truth is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves."
There is a solution to the IRA/401(k) dilemma. It's a strategy that guarantees safety of principal while providing competitive rates of return. It's liquid and flexible. It protects you from market volatility while providing tax-free accumulation and access to your money.
Let's set the stage with an example:
Mr. "Taxed To-The Max"Assumptions:
a 60-year old has $500,000 accumulated in IRAs/401(k)s
the funds are earning 7.2%
this person does not intend to retire or need the money
until age 70, so the accounts double during that 10 years
to $1million, tax-deferred.
Compare this to:
Ms. "Iva Lot More"Assumptions:
this 60-year old rolls-out 20% of her $500,000 IRAs/401(k)
to an MFTA insurance contract each year to age 65
she pays $30,000 taxes for 5 yrs at today's lower rates
all taxes have been satisfied within 5 years ($150,000).
Who pays more taxes on their IRA?
