How Will The Election Affect Me and My Taxes?
How Will The Election Affect Me and My Taxes?
I think it’s safe to say that none of us need to be reminded an election is coming up this year. Wherever we turn there is talk about it, especially with the Democratic and Republican Conventions just finishing.
When an election year is in full swing there is usually some craziness and it can be hard to weed out what to believe. So the question becomes, “How will the election affect me?” How will the election affect my retirement, my taxes, or my business?
As always, you have different campaigns promising different things, each which can greatly affect the outcome, your retirement, your taxes, or your business.
Mudslinging is one part about elections that I really don’t like. I wish that politicians were made to follow the rule in my house, which is, “If you say one bad thing about someone, then you have to say three nice things about them as well.” Could you imagine if politicians had to do that? It would definitely be a different world!
During campaign season we move into the Presidential Debates, which are coming up here shortly. There are always key issues that come up during the debate, one of which is taxes. Let’s talk about that.
Oftentimes candidates say that they’re going to lower taxes or their opponent plans to raise taxes. Some may say that they’re going to raise taxes, but only on the wealthy. However, your definition of wealthy and the government’s definition may not always be the same. Depending upon your income and geographical location, you may feel that you’re middle class, but on a national scale, you may be considered middle to upper, which might fall into the government’s definition of wealthy. This means that your taxes may be going up, regardless of whether or not you thought you fell into that “wealthy” category.
How Will The Election Affect My Retirement?
Without getting too much into the political side of the issues, let’s talk about what we know.
First of all, we know that our government has established a system of checks and balances so that no sitting president can single-handedly uproot our democracy and do whatever they want to. With all of the proposed legislature having to go through congress, it takes some time to move new tax laws through the government and into law.
If we think back to the Trump tax cuts that were established, it took a few years in office to get some of those tax changes in place. On top of that, it took even a little more time for those tax changes to affect.
Another thing that we know is that the national debt is going to continue to rise. Considering all of the PPP loans and small business grants, 2020 is shaping up to be a year that will really add a lot more to our growing debt.
As a result, the money to lower the debt has to come from somewhere, so our taxes are probably going to have to go up at some point. Most people I speak with agree with that.
Since taxes are always a topic of discussion with any president and within all levels of government, we know that tax law will be continually changing. Within that talk of tax and change is the topic of IRAs.
How Does the Secure Act Affect My IRA?
In particular, the taxes that are associated with IRAs. In fact, there was something called the Secure Act that was recently passed that deals with some of the issues around IRAs and taxes.
One part that is outlined is eliminating the stretch IRA option for beneficiaries. This means that the money will need to be taken out within 10 years versus having the ability to take it over the beneficiaries’ lifetime.
For some accounts, this may not be a big deal, but for those people who have large IRA accounts, this means there will need to be more distributions taken in a shorter period of time, which, of course, means higher taxes. The other negative is that we don’t really know what the tax rates are going to be at that time, so that amount of money that you’ll lose to the government becomes a great unknown.
The one thing to note is that we know what the taxes are right now and no matter who wins in November, nothing is changing overnight.
How Can Taxes Affect My Retirement?
With knowing the taxes now and the uncertainties in the future, what can we do about it? At the beginning of this year, the Serenity Prayer was in my heart. “God, give me the serenity to accept the things that I cannot change, the courage to change the things I can, and the wisdom to know the difference.” How fitting for this year.
This also applies to taxes. We can do things right now that can lower the taxes. To do this, there are a couple of options that I’d like to share with you.
First, if you have an IRA account, especially a large one, you might be looking at your statement thinking, wow, I have 1 Million dollars in my IRA. Unfortunately, the truth is that you might have around $700,000 because the other $300,000 is going to your silent partner, Uncle Sam.
The problem is we don’t know exactly how much you will be able to take out when the time comes to take the money out and pay the tax.
Can I Reduce Taxes On My IRA?
There are some great strategies to start reducing that lifetime tax on the IRAs now. In fact, one of our partners, Martin Ruby, wrote a book on this. In the book, he talks about the No-Compromise Retirement and how to reduce the taxes on your current IRA account. You can download a sample of his book if you’d like.
So there’s an opportunity to take a look at those accounts and see if there is any way that you can start reducing the lifetime tax. Now, you may say that you don’t care because it is going to just go to your kids someday, and that’s fine, but here’s my question for you. Would you rather your money go to your kids, a charity, or to the government?
Usually, when asking this question, Uncle Sam is the last one on the list, and the only way to keep it that way is to plan now.
Another opportunity that’s a great option applies to anyone that has investments in non-qualified accounts. This means that the account is not an IRA or Roth but maybe some type of bond fund or stock fund.
Especially this year with the market being crazy, a lot of people sold or liquidated some or all of their accounts. This means that a lot of times the funds end up taking a capital gain because they had to sell it regardless of the selling price, which means that the gain was pushed back to you.
We see this happen quite a bit where people end up having to pay capital gains and dividends even if they hadn’t taken the money out. Well, there are a few great strategies to reduce that, but I will tell you a secret. You have to do that before January 1st.
If we wait until January 1st to look at tax planning opportunities, it’s too late. The year is done, we can no longer go back and plan differently.
If we take a look now, there are some easy ways inside of your account that we can offset those taxes. There is a great strategy available in the tax world right now called Opportunity Zones.
Maybe you’re looking to get out of a fund but haven’t yet because of capital gains. Maybe you have to sell a house or a farm but haven’t because you’d be hit with capital gains tax.
There are funds available that allow you to invest in the opportunity zone and if you do, it will delay the capital gains tax and then also be able to reduce it. So, it could be an option for you.
If you are concerned about taxes, you have to be proactive. Do things now. Make changes now.
You can watch our Dream Retirement 101 webinar, which talks more about this topic and how taxes are a vital aspect of our retirement plan and our overall financial health.
We need to make sure that we’re always looking at taxes and our financial health because what happens with taxes can affect all other areas of your retirement.
Watch that webinar and if you have any questions at all or would like to go over anything in your current portfolio, we are always here. Schedule a call with us today.
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