Your tax bill: $321,050
If you are a successful professional or business owner and your goal is to retire with $100,000 per year in retirement income, this is roughly what you can expect to pay in taxes over the course of your retirement. (Let’s assume you retire at 65 and you or your spouse lives to age 90.)
How can this be your tax bill? Aren’t taxes supposed to be lower when you retire?
How it happens: When you contribute to a 401k, SEP, IRA, 403b you get a tax deduction now. Which is good. However, you still have to pay those taxes. Just not right now. You pay them when you take out money at retirement. Any money you take out is taxed as ordinary income. Just like it is today.
While the tax deduction you get now helps to increase your current cash flow, when you retire your deductions are lower, kids are out, home is paid off…so you get hit with the full force of the U.S. tax code.
Solution: Save into taxable and tax free buckets to cut retirement taxes by 50% or more.
Take a balanced approach. Instead of waiting to pay all the taxes you owe on your retirement funds until later on, pay half of the taxes now so half of your money is tax free at retirement. The impact is huge. Consider this before and after example on $100,000 in retirement income:
Taxes Before
Taxes After
Savings: $234,125 over a 25 year retirement. $9,365 per year.
Note on the “Taxes After” – the adjusted gross income is lower because the tax free income is not reported to the IRS. You are still taking out $100,000 per year and your spendable income increases. The other $50,000 is coming from a tax free strategy such as an indexed life policy. How this will work for you, depends on your retirement income and your situation. Either way, some tax free income is never a bad thing and you don’t want to end up with tax surprises in retirement.
For a more in depth look at this issue, check out the “Successful Professionals Guide to Wealth For Life”. You’ll find quick and concise strategies for creating tax free income as well as case studies we have compiled over the last decade. Use the form below to download.
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