Some surprises are great, like birthday parties, getting a surprise visit from a family member or friend, and winning the lottery. Others may not be as much fun, like taxes and unforeseen expenses. However, there are ways to help prepare for these expenses so that they’re not surprises. As an example, the SECURE Act changed several rules regarding IRAs that everyone should know about. And with the Tax Cuts and Jobs Act expiring in 2026, there will be more changes to come. Don’t be surprised – know what potential retirement costs to watch out for.
Tax planning in retirement is one of the most important facets of a retirement financial plan, as you may have more control over your taxes in retirement than any other time in your life.
But there are some land mines, too. One deals with withdrawals from your retirement accounts. You should understand that you have not paid income taxes on most, if not all, of your IRAs, 401Ks, and other retirement accounts. And when these monies come out, they are taxed as ordinary income and cannot get capital gains treatment. If you take withdrawals before age 59 ½, you will pay an additional 10% federal penalty. And, at age 72, you MUST begin taking taxable withdrawals from the accounts, which could trigger much higher tax brackets.
You also could get a big surprise with taxation on your social security benefits, as up to 85% of your benefit could be subject to income tax. The amount of total income on your tax return drives the amount of your social security benefit that becomes taxable. So, anything you do that could trigger a taxable event, including how you draw income and how you invest your money, could cause issues with your social security taxation.
Furthermore, unless something changes, at the end of 2025 under current law, tax rates are slated to go up again as the tax rates reset to the rates in 2017 (the rates prior to the Tax Cuts and Jobs Act).
Ultimately, understanding your tax exposure, and taking advantage of your planning opportunities is an important part of your financial future.
Once Americans turn 65, they might think their healthcare costs will go down thanks to Medicare. And while Medicare does help cover these costs, beneficiaries must still pay premiums, and premiums have been increasing much more than the rate of inflation. In 2020 alone, base premiums for Medicare Part B will increase nearly 7% for 2020 to $144.60 per month1. And the amount of income you earn can cause you to pay additional monthly Medicare surcharges (depending on your total income).
And then there are costs for Part D – prescription drugs, and potentially supplemental coverage through Medigap or Medicare Advantage. Consequently, while our government Medicare program is designed to help control your total out of pocket medical costs in retirement, it’s critical not to overlook these costs when budgeting for income.
According to government estimates, someone turning 65 today has an almost 70% chance of needing long-term care later in life. And that means that a married couple has an almost 50% chance that BOTH spouses will need long-term care. And, 20% could need it for longer than five years2. When you consider that the median annual cost of an assisted living facility is $45,000 and the median annual cost for a private room in a nursing home is over $97,0003, covering long-term care costs is a major feat. Keep in mind that Medicare and Medicaid typically don’t cover costs and that paying with funds from a traditional 401(k) or IRA can trigger a larger tax burden, which can snowball the costs.
Furthermore, one of the biggest consequences without a plan for these potential costs is often the effect on the life of a loved one. Usually, a spouse or child often has to bear the role of primary caregiver when funds are not available to pay for long term care.
Disclaimer: This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. We do not offer tax or legal advice or services, always consult with qualified tax/legal advisors concerning your own circumstances.
Insurance and investment products and strategies offered through Networth Advisors, LLC. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Networth Advisors, LLC. are not affiliated companies. We are not affiliated with the Social Security Administration or any other governmental agency. 606468
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Insurance and annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company.
Our firm is not affiliated with the U.S. government or the federal Medicare program.