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Don’t Forget About Tax Free Retirement Planning

The following is a guest posting from Sten Morgan of Legacy Investment Planning. Sten has offered some ideas considering the new tax laws. 

For years the focus of retirement and tax planning has been “deferral” of taxes.  Kick the tax can down the road and take distributions when your tax rate is lower in retirement.  Unfortunately, this way of thinking has caused many to overlook the value of tax-free retirement accounts.

In my opinion, this previously held philosophy has a few flaws.  The first assumption is that your tax rate is going to fall dramatically in retirement. For many, it does not.  If you want to maintain a similar standard of living and receive social security, pension benefits, and qualified retirement distributions your tax rate may only drop slightly.

In addition, the recent tax reform has ushered in lower tax rates until 2025.

Tax rates are near historical lows (even though taxes will always feel high to all of us).  If you believe tax rates will trend up in the future and even increase dramatically, building tax-free retirement accounts for the next 8 years will be very beneficial.

So how do you do it?

  • Consider funding a Roth IRA annually if you qualify.  If you are under age 50 you can fund $5,500 into this account for 2018 and if you are over age 50 that number increases to $6,500. Unfortunately, some individuals may not qualify for this option if they pass a certain income threshold.
  • Consider the “Back Door” Roth strategy if your income is too high to fund a Roth IRA annually.
  • Consider utilizing or adding a Roth 401k option.  Roth 401ks do not have income limits so if you do not qualify to fund a Roth IRA you can fully fund your Roth 401k instead.
  • Consider converting Traditional IRA funds to Roth IRA accounts.

Building a balance of tax-deferred and tax-free retirement funds will allow your financial plan to adapt more quickly to ever-changing tax laws.

Net Cash is the key

At CAPSTONE, our focus has always been the net cash impact of a transaction, not the sale price.   You can not spend the sale price.  You get to spend/invest the net proceeds.  Further, for most of my business career, starting in college, I always rejected the idea that I won’t need much money when I retire as I will be in a lower tax bracket.  That seemed to be counter-intuitive.  I didn’t want to be in a lower tax bracket.  I wanted and continue striving for a higher tax bracket which means my available cash, my estate and my net worth would continue to grow which would increase my flexibility to invest, to tithe, to help others.

Please seek advice from a professional like Sten, if not Sten.  Your retirement is too important to trust the government.  We always advise our client to interview 3 advisors before picking one.  Find that advisor that with whom you are comfortable.

Sten J. Morgan, CFP®, ChFC®
Financial Services Executive
Special Needs Financial Planner

Integrity. Guidance. Results.
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Suite 450
Franklin, TN 37067
Direct:  (615) 435-4159
Main Office: (615) 435 - 4117
Fax:  (615) 778-9787