For example: Imagine if you needed $4,000 a month in retirement income to survive your monthly budgeted expenses. The math would say that you needed to have $4,000 x 12 months or $48,000 a year that would come out of your "retirement" portfolio.
That seems crazy but it is VERY REAL and because we have been trained to allow our employer and/or our accountants do the math for us or the bookkeeping for us each year, most Americans are totally disassociated with this part of their financial strategy and therefore not understanding this part of their financial "roof" they are without and that their portfolios are ravaged in retirement accordingly. To find out what your tax bracket is visit: www.irs.gov
The REALITY CHECK is that we all have to understand that with every dollar of "income" we Americans make we have an UNCLE who gets his portion and that is called "income tax." So the first portion that we have to account for is the 15%, 25%, 28% or higher that comes out of our check to pay our Uncle. In addition we then have to account for the additional taxes that come out of our checks prior to retirement to pay for the American Insurance Systems. Those are, "social security" withdraws. In retirement they are called SSI (Social Security Income) and on your check stubs it is called FICA (Federal Insurance Contributions Act) and right now it is costing you apx. 7% of every dollar of income you make. If you are the employer of those making this income then you have to pay additional TAXES on every dollar you pay out to your employees such as a match to the FICA and also your state unemployment tax so that you can help fund the unemployment pool in your state. The list just goes on and on.
In a "RETIREMENT STRATEGY" there are 2 things you need to try to accomplish where taxes are concerned. 1) Pay less and keep more before you retire and 2) Be "proactive" in putting your retirement dollars in the right place to ensure you either "do not" pay taxes on the dollars in retirement (i.e. ROTH IRA or other "Tax Sheltered" options) or pay the very least you can pay as to avoid this element of TAXES each time possible.
An example of NOT PAYING income taxes on dollars you are already spending is: 1) Section 125 of the IRS code allows an individual who's employer has set up a "cafeteria plan, section 125" to "pre-tax" many insurance premiums, and if the employer has a FSA set up (Flexible Savings Account) you may also be able to deduct your child care and transportation expenses that you are currently paying for with after tax dollars. Ask your employer TODAY if they have a "125 cafeteria plan" set up. 2) Another example is purchasing a health insurance policy that is compatible with an H.S.A. (Health Savings Account). If you fund an HSA, the dollars are 100% "income tax" deductible yet when you take the dollars out of the account for medical, dental, vision and other medical related expenses, they come out "income tax FREE." Also HSA dollars roll over so anything you put into the HSA is YOUR MONEY and you can accumulate unused funds each year and grow them TAX FREE as well. In later years if you have accumulated a large pool of HSA dollars and you chose to use those dollars as income you can opt to do so and pay income tax on those dollars at that time. I usually recommend against a client using HSA dollars for income however because if the client continues to withdraw the dollars for the scheduled services allowed, then the dollars continue to come out TAX FREE! To research these items visit www.irs.gov
An example of NOT PAYING income taxes on dollars you are accumulating now and deferring the "income taxes" till later is: a 401k, 401a, IRA or Annuity. There are many more, however, these are the most familiar to the public. Why pay income taxes TODAY on the growth of your money when you can defer that TAX till a later day when your income tax bracket is MUCH LOWER?
For more information on this element of TAXES to your financial house's "roof" please contact our office for a FREE financial consultation.
"The power to tax is the power to destroy." Author 40th President of the United States of America, Ronald Reagan