Saving for retirement using tax-deferred strategies like defined contribution plans and IRAs can be smart. These plans help reduce a client’s current taxes while they are in the workforce while also taking advantage of any employer match offered. This can help increase savings while delaying taxes.
The balances in defined contribution plans and IRAs have been steadily increasing in recent decades. But taxes will need to be paid when retirees start withdrawing funds to cover their retirement expenses. This presents the potential risk for being taxed at increasing rates.
When appropriate, a financial professional may counsel clients to roll all of their pretax assets into IRAs. This move would consolidate their funds and develop a strategy that meets their current and future income needs.
Although, some clients are in an enviable position – they have other income sources that are more tax efficient. These clients do not need to withdraw from their accounts that are subject to regular income tax right away.
It sounds counter intuitive, but those clients who are well funded for retirement may be more likely to experience tax issues. The IRS has announced a 7% increase in marginal brackets to adjust for inflation, which may help a little but won’t eliminate the tax risk.
Here are three tax issues these clients may encounter.