Are Taxes the Hidden Shortfall in Your Retirement Plan? | Michael Makes Sense Ep. 05
Michael Makes Sense
Michael Widlake explores the often-overlooked tax implications of retirement income, debunking the myth that taxes decrease once one stops w
Key takeaways
- Up to 85% of Social Security benefits can be taxed as income due to legislative changes from the Reagan and Clinton eras.
- The SECURE Act of 2019 mandates that certain heirs must liquidate inherited IRAs within 10 years, potentially pushing them into higher tax brackets.
Main topics
- Retirement Tax Liability
- Social Security Taxation
Notable quotes
The IRS co-owns your retirement saving with you.
Conclusion
Successful retirement requires a strategic approach to managing tax va
Transcript preview
Speaker 7 (0:00) In uncommon financial times, common sense matters. Welcome to Michael Makes Sense, where Michael Widlake answers your financial questions and welcomes special guests to share their insights, real questions, clear answers, conversations that make sense. Speaker 3 (0:15) Welcome to another episode of Michael Makes Sense, where we answer your retirement questions with common sense advice for uncommon financial times. Today's topic is one that surprises many people after they retire. taxes. We've received several questions from listeners. So Michael, are you ready for the first one? Speaker 1 (0:35) This is a big topic, so let's jump in. Speaker 2 (0:39) Hi, Michael. I'm Eric from Maryland. My wife and I have saved diligently for retirement for over 30 years. We've always assumed that once we retire, our taxes will drop dramatically because we won't be working anymore. Is that really how retirement works? Speaker 1 (0:55) Okay, Eric, this is a very common misconception and one that's supported by a lot of confusing information in the media. And for most people, their taxes will not be significantly lower in retirement. And this is for several reasons. First of all, if you even have a pension, that's fully taxable as income in your retirement. It may also be taxed at the state level as well, although some states do give you a pass under certain circumstances. Next, and surprisingly, up to 85 % of your Social Security can be counted as taxable income in your retirement. This is thanks to some rule changes made by Ronald Reagan and the Congress of his time, and those changes initiated taxing Social Security, and before the Reagan administration, Social Security was not taxed at all. Then Bill Clinton and the Congress of his time changed those rules just a little bit more that allowed more of your Social Security to get taxed in retirement. In addition to the federal government taxing it, there are eight states that also tax your Social Security benefit as well. Then the most egregious problem is with your 401k. It is common knowledge that saving pre-tax money in preparation for your retirement is the best possible thing to do. But does the math actually prove that out? And in fact, the math does not always bear this out. Yes, you save money on your taxes today, but that is just deferring those payments until you're retired. And in retirement, We like to say that the IRS co-owns your retirement saving with you because they have a say in how much you use and how much you have to pay them. Required minimum distributions are the IRS controlling how much of your savings you use. This is also emphasized by the changes to the rules that happened in 2019 called the SECURE Act, that if your children or anyone but your spouse inherits some portion of your IRA money, that they have a limit of 10 years time frame to liquidate the money from that account and pay all the taxes on it so the IRS can get their piece. this sped up withdrawal schedule has the potential to push people into significantly higher tax brackets during their prime