When you reach retirement have you thought about what tax bracket you will be in? Will you be in the same bracket that you are currently in? Will tax brackets stay the same or will they go up?
The bottom line is nobody is 100 percent sure about what the answers will be to these questions. We can’t control what happens with taxes as they are controlled by the government. What we try and get our clients to focus on is putting their money in places that will be tax-favorable
Where can you put your money that is tax favorable? The two main places that you can put your money that can avoid any taxation is permanent life insurance and roth IRA’s. Roth IRA’s are great tools, but they are highly limiting. If you make too much money, you can’t participate. The government dictates how and when you tap into the money. Don’t get me wrong as it is great if you can take advantage of it. The other tax-advantaged vehicle is permanent life insurance. You can build up the cash value inside the policy on tax deferred basis and then tap into it tax-free. You tap into it tax-free by withdrawing up to your cost basis first. Once you have hit cost basis you get a stream of income through preferred policy loans.
One of the main places people put money is in tax-deferred vehicles like 401k’s. While the tax deferral makes the money compound quicker, deferred compound taxes have to be paid on the backend. The more vehicles that you withdraw from at retirement that you have to pay income tax on, will potentially place you in a higher tax bracket.