The Impact of Taxes on Retirement

History has taught us taxes never increase evenly across the board for every client. Marginal tax rates and measure of income — whether it’s modified adjusted gross income or combined income — are two important aspects to be considered. They can have a devastating effect on retirement income planning.

When we think about income, we typically go straight to the bottom line of tax form 1040 where we find the adjusted gross income, which is usually a good benchmark.  However, that is just one part of the retirement income planning puzzle.

Consider Social Security and the impact of how it is taxed. There’s a big difference between a tax of 50% or a tax of 85%. Adjusted gross income is taxed at 50%. But combined income plus non-taxable income (such as a municipal bond) can boost your client up to a tax of 85%.

The point is that with a variance of 35% we must be extremely careful what we use for income. Likewise, one of the biggest hidden taxes that we talked about last week is Medicare premiums. Those can escalate dramatically with higher incomes. In fact, due to means testing, it can be as much as 240% higher than the standard rate even though it is based upon the modified adjusted gross income commonly referred to as MAGI. MAGI is modified adjusted gross income plus nontaxable income. But what’s tricky is that those premiums are based upon modified adjusted gross income from two years prior.

All of this leads to three important ideas to focus on.  First, the decisions that you make today about income planning will affect many of the hidden taxes two years from today. Second, you must be crystal clear about where income is coming from and the impact of tax free versus tax deferred. And third, tax control will be more important than ever with tax uncertainty over the next couple of years.

Reach out to our retirement income consultants (800) 589-3000. Talk to them about our tools and resources to help you make sound decisions and increase the probability of success for your client’s retirement income plans.

Transformational Tactic

When it comes to income, all sources are not taxed equally. Increase your client’s chances for retirement success by considering tax implications now.

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