Conventional wisdom and a three-year plan

Why now is the time to help clients plan for higher taxes in the future.

• Jeff Snyder

Over the next three years — 2023, 2024 and 2025 — your clients can avoid unintended tax consequences and other possible financial pitfalls during retirement based on proactive asset reallocation now through Dec. 31, 2025, when current tax laws sunset and tax rates go up.

Doing so will reduce future tax burdens during retirement, creating more money for whatever retirement brings. Furthermore, it will also allow your client’s accumulated assets to last longer in retirement, providing more flexibility and greater peace of mind.

After all, the major financial objective of retirement planning should be to create the most income possible during retirement. The goal of retirement planning never has been about getting a modest tax break today on qualified tax-deferred retirement plan contributions. Nor should it be about only growing assets in qualified tax-deferred retirement plans that will be decimated by taxes in the future while at the same time potentially making Social Security subject to income tax — all of which will reduce one’s income during retirement.

Currently, distributions received from all types of qualified tax-deferred retirement plans are always 100% taxable because of the tax deferral on contributions made and the tax deferral on any growth along the way. Deferral simply means “to be paid eventually” and not “to be eliminated.” Additionally, although there may be a process involved in raising taxes, the federal government can (and does) raise taxes whenever it wants or needs to.

If you don’t believe me, search federal income tax bracket history on the internet and you will see. Dec. 31, 2025, is a perfect example of when current tax rates sunset and revert to previously moderately higher rates. Unfortunately, contributing to a qualified tax-deferred retirement plan makes you a retirement partner with Uncle Sam, and he can increase his share of your retirement plan at any time.

Furthermore, although I am not a tax expert, as I understand it, qualified tax-deferred retirement plan distributions from vehicles such as 401(k)s, individual retirement accounts, 403(b)s, 457s, Keoghs and SIMPLE SEPs are considered provisional income. If total provisional income received in a given year is greater than stated thresholds, then income received from Social Security will become taxable. (Check with a tax expert for current thresholds.)

That’s right, the IRS tracks all provisional income received each year from things such as employment income, rental income, interest from municipal bonds, 1099 income from taxable investments, distributions from qualified tax-deferred investments and one-half of Social Security income. So, provisional income is totaled, and based on your client’s tax filing status, the IRS determines what percentage of Social Security benefits is to be taxed at your client’s highest marginal tax rate.

The tax planning from 1981 won’t hold up today

Back to my point. Understandably, the premise stated in paragraph two of this article conflicts with conventional wisdom, but conventional wisdom has not