#3 Not Planning for Taxes
I have been in a church on more than one occasion where the preacher has referenced the Bible verse that calls for Christians to be cheerful givers, and I have met some extraordinarily generous people over the years that truly embody the spirit of generosity. However, I don’t know that I have ever met a cheerful taxpayer. I’m sure they exist…they probably are great friends with Peter Pan in NeverNeverLand. Yes, I do believe that taxes are an essential ingredient to making society work—but our government’s increasing appetite for tax revenue is creating a significant divide in our country as more and more of the tax burden is shifted to higher income earners and retirement savers who’ve accumulated wealth in their retirement accounts.
In their simplest form, taxes are a way for citizens to fund our government and its core functions. Over the last few decades, however, there has been a significant shift in beliefs about what the core functions of our government actually should be. Because my aim is not to be political, I will only suggest that BOTH of the major political parties are guilty of being poor stewards of our nation’s tax revenues. Poor legislation and even worse fiscal policy have resulted in our nation finding itself in a tremendous hole from a budgetary perspective.
There are 3 ways to get our nation out of debt—
We raise taxes
We cut spending
We grow our way out through increased GDP
Unfortunately, if we raise taxes or slash spending to the bone, it somewhat eliminates the probability that we’ll see any economic growth.
So, what is likely to happen? If you were to talk to 100 economists, you will probably get at least 101 solid opinions on what to expect in the coming months and years ahead. For me, I take a simpler approach: Expect taxes to go up. The best way you can protect yourself from this is to create a plan to be as tax-efficient as possible during retirement.
How can you do this?
First, if you can, discover your friend the ROTH IRA. These accounts can be quite magical if used correctly, and they offer savers an opportunity to have their investments grow tax-deferred and qualified distributions come out tax-free.
Second, work with a financial planning expert with a great knowledge base about IRAs to discover if you have any opportunities to make ROTH conversions from existing IRA accounts. Take caution not to be over aggressive with the conversion process, as you don’t want to pay more in taxes than necessary or decimate your IRAs. However, as we continue to see pressures that may push taxpayers into higher tax brackets, converting some IRA assets to ROTH could be a great move.
Lastly, find creative ways to get tax deductions by leveraging charitable giving through trusts or donor advised funds. As you get older, it is possible that your ability to itemize deductions on your tax returns will fade. Since charitable giving is an itemized deduction, it’s quite possible that you are giving but not receiving a tax deduction for it. Obviously, I am all for charitable intentions—but if you can also benefit by doing good, shouldn’t you? I’m not a believer that philanthropy should only be a win for the beneficiaries—it can and should be win-win.