retirement planning tallahassee

The Impact of Taxation

by John Curry

In this minute today together, we’re going to talk about the impact of taxes on our financial planning and retirement planning. Most people are paying too much in taxes, and they don’t really know how much tax is taking away from their wealth. You see, every dollar you lose to taxes is a dollar you cannot invest for your future. Therefore, you have what economists call an opportunity cost, because, if you pay the tax of, say, a thousand dollars, that means you don’t have that one thousand dollars you could be investing.

So, think about this for a minute. If you could reduce your taxes and, let’s say, you earned a six percent rate of return in whatever you put it in, you would have money for your future that currently is going to taxation. That’s why in the planning that I do with my clients, we often start with taxation. Can we find ways to free up money that you’re now giving to the IRS and apply that money, deploy that money in ways to help you. Now, don’t get me wrong. I believe in paying taxes. We live in a great country, and we need to pay for the right to live here and help our system. But it’s important that we don’t overpay.

In 1913, when the income tax began, it affected very few people. When I ask people what the maximum tax rate has been, most people think it’s around forty percent. However, if you go back to 1913 to the current tax rates, you’ll find that our top marginal tax rate was over ninety percent at one time. For well over two-thirds of our tax history, the top bracket has been fifty percent or more. Currently, the top bracket is 39.6 percent. (Source: United States Treasury Department, Internal Revenue Service, 2016) What will it be when you retire? Some believe that congress will never raise the income tax rates again, and why not? I believe they will. They’ve done it in the past. Currently, we have a two-year fix, if you will, regarding estate tax and income tax that congress and the administration agreed on.

However, we live in a different world. We have pressures with Social Security. We have pressures with Medicare, Medicaid. Pension plans are in trouble. We have to be planning and thinking as if we will be in a higher bracket when we retire. And if you are in a higher bracket, that means you have less income to enjoy during your lifetime.

So, don’t ignore taxes, and don’t just wait until the end of the year when it’s time to settle up with IRS. Do some planning along the way and find ways to reduce your tax burden and redeploy those tax savings into programs to help you plan for your future and enjoy a secure retirement.

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