Many families think of retirement planning like University of Kentucky Basketball recruiting: one and done!
That isn’t always the best route. Reviewing your plans now, especially considering the impact of tax deferred instruments such as 401k’s, IRA’s and even some annuities is extremely important to prevent huge tax consequences and losses in the future.
If losses are larger in the future and healthcare costs continue to rise, many families are going to lose much more than they ever expected.
Scott Collins, Owner and Attorney for Elder Law Guidance: The Law Office of Scott E. Collins, PLLC, offers guidance on three current financial items that will likely affect your retirement plan:
The SECURE Act. “It’s a double-edged sword that can assist you but it could hit your children or heirs hard down the road,” said Collins.
The Tax Cuts and Jobs Act. “It has had a tremendous impact on retirement planning, long-term care planning and Inheritance/Estate Taxation,” said Collins. “However, the tax benefits are set to sunset (or expire) in 2025.” With the increase to the Federal Deficit created by the coronavirus pandemic, there could be huge tax changes ahead.
COVID 19 stimulus aid. The numerous programs that the federal government (and significant State aid) has increased the deficit to 26 Trillion dollars. Deficit and Gross Domestic Product is a complicated matter, but in the end, debt has to be paid, and taxes have been the method of choice for the federal government. Higher taxes over the next decade would not be a surprising change.
What does all of this mean? “It means that for retirees, we are at one of the lowest taxation periods in history,” said Collins.
Should you consider paying some taxes now on tax-deferred investments rather than waiting until a later date when the rates are higher?
The perfect storm of the increased U.S. debt, the sunsetting of the estate tax provisions in the Tax Cuts and Jobs Act in 2025 and the IRA stretch under the Secure Act could very well have an impact on you and your children. How big will that impact be? That is yet to be determined but putting our heads in the sand doesn’t avoid the risk.
“We want to help you avoid the future perfect storm,” said Collins. Call (859) 544-6012 to schedule an appointment or for free resources that will help you understand these issues relating to your retirement/estate plan.
Importance of Reviewing Your Retirement Plan After Income Changes
Reviewing your retirement plan after a significant change in income is crucial for maintaining financial well-being and ensuring that you are on track to meet your retirement goals.
A change in income can affect your ability to contribute to retirement accounts, necessitating adjustments in your investment strategy or savings rate. For instance, an increase in income offers an opportunity to boost retirement savings or consider catch-up contributions, particularly in tax-advantaged accounts like 401(k)s or Roth IRAs.
Conversely, a decrease in income may require reassessing your financial situation, possibly adjusting your asset allocation or reducing contributions while focusing on maintaining an emergency fund.
Regularly reviewing your retirement plan in response to these changes helps secure your financial future, allowing for timely adjustments in your savings strategy and investment options based on your new financial circumstances and retirement age aspirations.
Tax Law Changes Prompting Retirement Plan Review
Changes in tax laws are a critical trigger for reviewing your retirement plan, as they can impact the tax efficiency of your retirement income and the attractiveness of different retirement savings options. For example, adjustments by the Internal Revenue Service to income tax brackets, tax breaks for retirement contributions, or changes to the rules governing retirement accounts can significantly influence your financial planning and the growth of your retirement assets.
Financial professionals recommend an annual review of your retirement plan to incorporate these tax law changes, ensuring that your investment portfolio aligns with the most current regulations and tax advantages.
Such a review can help you optimize your contributions to retirement plans, adjust your investment strategy to take advantage of new tax incentives and reassess your risk tolerance and retirement goals in light of the evolving tax landscape.
Engaging with a financial professional or utilizing resources from the Social Security Administration during these reviews can provide valuable insights into making informed decisions for your long-term financial security.
