Retirement nightmares

When it comes to retirement nightmares, there might be nothing worse than seeing your retirement investments, your pension, or whatever else it was you depended on to fund your retirement go up in smoke. After the dot-com stock market collapse and the Enron debacle, for example, people should know not to put all their eggs in one basket, that diversity in retirement investments can protect against losing everything.

But there's another thing to look out for that can have the same disastrous effect on your retirement plans - Uncle Sam.

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Most of us do our retirement investing with the goal of accumulating as much money in our retirement savings account as possible. When we think about taxes and our retirement investments, we generally are thinking only about whether or not we should invest with "pre-tax" dollars, use "tax-free" investments and so forth. We figure that later, when we start drawing on our retirement investments, we'll worry about the taxes then and that, somehow, it won't be a big deal because we supposedly won't be in as high a tax bracket.

The truth, though, is that, without properly planning our retirement investing planning, Uncle Sam could take as much as 90% of your retirement funds!

As an example, once you reach 70 1/2, you have to begin withdrawing required minimum distributions from your retirement plan. If you don't, you'll have to pay a 50% penalty tax on any part of the required minimum distribution that you don't withdraw.

If you're still working, however, you can delay beginning your required minimum distributions until you do retire. (There are two exceptions, however. If you own at least 5% of the company or if your plan is an IRA, you have to begin taking your required minimum distribution even if you're still working.)

Also, be aware that the payments you receive from ordinary retirement funds are taxed at regular income tax rates upon withdrawal. There's no special 'retirement rate'.

These payments are added to your total annual income and then taxed at the rate that applies to your income tax bracket. So, if you received a salary or earned significant income from sources other than your retirement plan, your retirement plan distributions may actually put you in a higher tax bracket than when you we're simply working.

Then there is the so-called Death Tax. That is the taxes on your retirement investments that will apply should you die. They could eat up a huge portion of what you intended to leave to your heirs. One common solution nowadays is to buy a life insurance policy that will offset the estate taxes that will be charged on your Individual Retirement Account or IRA.

For many people, your tax situation in retirement could actually be more complicated than it was while you we're working. And, if you're like most people, you haven't even thought about it. So start thinking. Consult with a professional. Its money well spent, and if you plan to leave any serious amount of money to your heirs, they will appreciate your thoughtfulness and the fact that more money will pass to them and less will go to Uncle Sam.

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  • required minimum distributions
  • retirement investing
  • Retirement Living
  • retirement funds
  • retirement investments
  • retirement plans
  • retirement savings account
  • Tax Deferred Plans
  • tax free investments


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Posted in Law Post Date 12/24/2016