Understanding tax strategies should be part of any reliable financial approach. Some taxes can be deferred, and others can be managed through tax-efficient investing. With careful and consistent preparation, you may be able to manage the impact of taxes on your financial efforts. One of the greatest concerns of Americans today is potential for taxes to increase. Rising taxes in retirement is an important risk for savers to understand.

This is especially true for individuals who have saved all or the majority of their retirement assets in tax-deferred vehicles, like IRAs and 401(k)s. These popular savings vehicles defer taxes to the future. If taxes are higher in retirement than they are today, savers with IRAs and 401(k)s could pay more in taxes than planned. That’s because in a rising tax environment, a larger portion of their IRA or 401(k) withdrawals would go to the IRS. Some savers are most concerned about higher taxes in retirement, since higher taxes pose the greatest risk to traditional tax-deferred savings vehicles.

While it’s not possible to predict the future, we can consider some of the potential ways your taxes could rise in retirement. It may be important for you to understand these factors and consider whether they could potentially impact your retirement approach.

Taxes are an important topic when it comes to retirement. After all, the more you pay in taxes, the less income you’ll have to spend.

When it comes to retirement, there are three possibilities for your taxes:

  • Your taxes could be lower in retirement than they are today. This is the premise of tax-deferred savings vehicles like 401(k)s and IRAs: you defer your taxes to the future in hopes that your tax rate will be lower in retirement than it is during your working years.
  • Your taxes could be the same in retirement as they are today. Savers who want to maintain their pre-retirement lifestyle once retired often need to maintain a similar annual income in retirement. For these savers, their tax rate may stay the same in retirement because their income needs stay the same in retirement.
  • Your taxes could be higher in retirement than they are today. This is a risk many savers are beginning to understand. With our current federal debt and recent congressional spending, tax rates in the future could be higher than they are today.

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