With the presedential election of Donald Trump and the Republicans in control of both the House and Senate, reforming the tax code will likely be one of the top priorities for the Trump administration. While the subject of taxes touches a broad array of issues, it’s important to project how a changing tax code may impact the way you plan for your retirement.
For the year you turn 70 1/2, the IRS mandates that you begin taking a certain amount of money out of tax-deferred retirement accounts such as 457, 403(b), 401(k) and IRAs. These mandatory distributions are called required minimum distributions (RMDs) and the penalty for not taking out what the IRS calcaulates is hefty: 50% of what you should withdraw (based upon an IRS actuarial table). Either by choice or circumstance, some retirees begin taking distributions earlier than 70 1/2 and these distributions are added to other sources of taxable income. Such sources include your pension, Social Security (possibly) interest, rental income and income from wages.
Currently, there are seven income tax brackets but under Trump’s proposal, only three would exist:
So how might Trump’s plan impact you? We don’t know for sure yet, but let’s examine a fictitious retiree named Aris. Aris is single, 60 years of age, and currently has income of $100,000. Aris wants to withdraw $50,000 from his IRA to put a down payment on a retirement home. Under the current taxing scheme, the $50,000 withdrawal would be taxed at 28%, which would chop away $14,000 and consequently net Aris $36,000. If Aris wants $50,000 net of taxes, he would have to withdraw $69,444. ($69,444 – ($69,444 * .28) = $50,000
Under Trump’s proposed brackets, should Aris decide to withdraw $50,000 he would be taxed as follows: ($12,500 at 25%) =$3,125 + ($37,500 at 33%) =$12,375 for a total tax of $15,500. This would leave Aris with net proceeds of $34,500. In this scenario, if Aris wants $50,000 net of taxes, he would have to withdraw $73,135. ($12,500 – ($12,500*.25) + $60,635 – ($60,635 * .33) = $50,000
While it appears that under the proposed new tax rates Aris would be paying more taxes, we should look at the first $100,000 to truly make a direct comparison.
As you can see, the first $100,000 under the proposed Trump plan results in lower taxes.
Let’s now add the additional 50,000 withdrawal to see how they compare.
A word of caution; the examples above assume that the only changes being proposed impact the tax brackets. There are other proposals such as child credits, deductions and other variables that may impact what is considered taxable income. We will not know the full impact of any proposed changes in the tax law until legislation is passed and regulations are published.
The Bottom Line
If you are thinking about making withdrawals from your qualified plans, you have the option of manuevering with certainty over the next few months, or you can wait and see how things develop under President Trump. In our fictitious retiree’s situation illustrated above, the difference in total taxes seems modest, however under the proposed scenario it appears that you would be required to liquidate a larger amount of your retirement account which would deplete it faster. From a planning perspective, making the financial chess moves using today’s known factors may give you peace of mind over the uncertainty that the future taunts us with. For example, it may be beneficial to begin systematic withdrawals from your tax-deferred retirement plans at today’s known tax rates and reposition those funds into a potentially tax-free pot of money to be tapped into later in your retirement years. Those dollars, if positioned properly, can even be used as defense mechanism against possible long-term care expenses. It just depends upon your resources, desires and the strategy that ties them together.
As always, financial decisions should be made with a lot of forethought and it is highly advisable to review your overall situation with a competent financial advisor and accountant before making any strategic decisions.
Securities and advisory services offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807 563-326-2064 www.ausdal.com. Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.