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Why would your tax rate be higher in retirement?

helpfullike
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Democrats

likefunny

I'm sure the pandemic has nothing to do with it guys.

99% of people will have lower tax rates in retirement.

Banks and financial advisors perpetuate the ‘higher tax rate’ myth so that people open Roth IRAs.

likesmart

If we charge a flat percentage, why would we care whether a clients money is in a Roth, ira or taxable account?

We are at historically low tax rates and there is a deficit problem. For a client who is 40 and might need to worry about taxes 50 years from now it helps to have choices.

Not to mention if you are working with clients who are wealthy enough they often pass Roth down a generation. With new tax laws their heirs would have to take that income in their highest tax years most likely.

like

You establish a cash flow business that's generates more income than your early working years.

like

Highly unlikely for most people but hey, myths perpetuates.

likesmart

I like to tell myself I will be a millionaire in my 60s and will definitely be collecting more money in rent from my real estate holdings than I currently make in my first job out of college. Furthermore, money can be taken out of roth ira early more easily than 401k. I feel more comfortable maxing out my roth ira knowing I can access those funds in case of an emergency or if I want to buy a house.

like

Ex real estate rentals

like

If you’re early in your career and increase your income significantly over time.

like

Sure, if it’s your first year out of college. That’s a bit of a cherry pick. Once you’re more than three years out, it won’t be higher.

A Tax rates increase. You take out a large lump sum to pay off a house, or buy a new house, or other large purchases.

like

What are the odds that you can forecast the tax rate 35 years ahead? If you are around 30 try forecasting what it was 35 years ago.

Personally o think that it is a red herring. My goal is to make sure that I maximize my wealth. My tax rate can be taken care of after I make my money.

Back to your question, Rua tax rate changed a lot over the past 35-40 years. The country has run a deficit for a long time that it needs to fund. If you roll mare young enough try to guess the tax rate 35-40 years ago. Other reasons the mix of your income changes, you don’t have deductions to offset the income etc.

like

I think it is unusual, but I have a client who was a stay at home Mom for several years and ended up divorcing her highly compensated husband and jumping back into the workforce after a long gap. She ended up getting half of 401k and a large portion of his pension in divorce and will for sure have higher income in retirement than what she is currently pulling in her medical billing job.

like

The people on this thread who are calling higher tax rate at retirement a 'myth'.. Hope they never end up as personal tax advisors.

A good amount of people in the US don't plan appropriately for retirement, so good chance this won't actually be an issue for the majority. If one had a kush job that has a pension plan, contributed well to their 401(k) plan, and receives social security in retirement, he or she may have higher income (and therefore fall into a higher tax bracket) than when in his or her 20s.

Let's not forget that the personal income tax rate fluctuates. Max income taxes are lower now than they have historically been.. For decades, the max income tax rate in the US was 90%. That was decreased to 70%. Its just prudent planning to consider various perspectives and an uncertain future in planning. With the national debt at all time highs, the lower tax rate applied to corporations, and a bunch of other factors, it wouldn't be unfounded for personal income tax rates to increase in the near future.

helpful

Very true. Especially when Required Minimum Distribution kicks in.

like

A lot of inconsiderate advice in this thread. This best way to plan for uncertainty is to hedge your bets.

Have different buckets for retirement purposes:

ROTH bucket, traditional bucket, and taxable accounts.

Focus more on contributing to ROTH early in your career and gradually shift to allocating between ROTH and traditional. The idea here to fill up different buckets to give you more flexibility when distributing in the future from the different buckets in a tax efficient manner.

If you know that you have a strong cash flowing real estate business, then adjust accordingly. Most people do not. They will be getting income from investments and not a working salary. Capital gains and dividends are subject to a separate tax bracket. The way that they're taxed may change in the future, but there's no possible way to plan for that unless you have a crystal ball.

like

I’m new to all this but I’ve read that part of it is that, decades into the future, it’s hard to know what tax rates will look like but they could go up over time.

You move to a higher tax state

Higher taxes due to governmental policy is about the only reason.

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likehelpful

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