The Retirement Tax Time Bomb is Ticking

Sam Payne

By: Sam Payne, SVP - Business Consultant at Asset Marketing Systems


Written On: April 11th, 2024

A few years ago, I wrote an article about the Retirement Savings time bomb referred to in a best-selling book by Ed Slott, recognized as America’s foremost Tax Expert. In that article I address how Americans continue to march toward, enter, and enjoy their retirement years, woefully unaware of the full impact taxes will have on their retirement savings and the income generated by these savings. Ed Slott refers to this as the Retirement Savings Tax Time-Bomb.

America’s Retirement Savers, like many of your clients and prospects, recognize that one of their most valuable assets is their retirement savings. They diligently put money away for years, yet most do not know how to avoid the costly mistakes that can occur when it comes time to use it. A good chunk of that retirement can be needlessly lost to taxes unless you help them plan.

What are the consequences of failing to plan, and how can you help them defuse this ticking time bomb? These are the questions I hope to shed light on in this article.

First, what is the Retirement Tax Time-Bomb?

The tax time-bomb is the tax liability accumulating within your individual retirement account (IRA) or 401(k). For most Americans, the fact that a portion of their qualified retirement accounts already belongs to the government does not even register. I say a portion because the real question is; how much? Unless we pay the tax today, we really don’t know what portion of the account belongs to the IRS.

I would bet most of you, like the rest of America, including myself, believe with our current government financial situation at the federal, state and local levels, taxes must go up to make ends meet. Today we are at historic tax rates…historically low tax rates. These favorable Tax rates and brackets are set to expire in less than 18 months. The question remains, what will our tax picture look like then? With over $34.5 Trillion dollars in debt and current Federal spending running at a $1.7 Trillion deficit, it doesn’t take a math wiz to figure out something has to change.

Reaching retirement with a plan that addresses and has a focus on the 5 pillars of Retirement Planning just makes sense. Beginning with Tax Planning and then continuing with the other 4 pillars: Investment Planning, Income Planning, Health Care Planning and Estate planning will help prop up and support your clients’ and prospects’ goal of the retirement they desire.

Starting with a conversation around our tax system, its graduated scale with differing brackets and the importance of utilizing or “pushing the bracket” when it comes to ROTH conversions. Also, a review of the current tax brackets and rates compared to what might be the future, should these current rates be allowed to sunset…

The question is, how are you helping your clients understand and plan for the effect of the tax time bomb?

Here are a couple of suggestions.

First, start having a ROTH conversation with every client and prospect. A ROTH conversion is not right for everyone, but beginning the conversation puts you in the position of valued advisor identifying and educating on topics that have the potential to have a major impact on the retiree’s future. Ask when and how they intend to use the IRA assets to see if a ROTH conversion makes sense. Show the value for those needing income 5 – 10 years down the road of a tax-free pension type income that they cannot outlive, with guaranteed growth via an FIA with an income rider.

Second, for any client or prospect who liked the idea of the “Stretch IRA”, reach back out to them and explain how the SECURE Act eliminated the stretch ability, and show them the financial tool that allows the best tax break in the IRS code…Life Insurance with its tax-free death benefit. Illustrate rolling a portion of their account into an annuity, turning on income and using the income to fund a permanent life insurance policy often giving the beneficiaries substantially more benefit, tax-free!

These two quick suggestions have the potential of making a major difference to your clients, prospects, and your business this year. Be sure to have the conversation with them before someone else does. Remember, these tax rates are set to sunset and revert to 2017 levels at the end of 2025!

The bottom line: While none of us knows what the future holds, as with any form of planning, the sooner and you begin the discussions and start the planning conversation the more prepared you, your clients and prospects will be. Start today!

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