Evans Tax Advisors' Blog

First a quiz.  Do you think taxes are going to go up or down in the next 10 years?

______ Up    _______ Down

If you saved $300,000 in your retirement account by the time you retire and you are in a 25% tax bracket, then the IRS “owns” 1/4^th of your account.  You will have to pay 25% of every withdrawal to the IRS. So really the IRS has claim on 25% of your retirement account.

You will have to pay the IRS 25% of every dollar that comes out of that account.

But what happens if tax rates go up?

If tax rates go up your retirement account effectively got smaller.

If tax rates go up and you are now in a 33% tax bracket you just “lost” $24,000 of value from your retirement account.

The IRS now “owns” $99,000 of your account in a 33% tax bracket instead of $75,000 in a 25% tax bracket: $24,000 in additional taxes is an 8% loss.

Now go back to the quiz at beginning of this article – which way do you think taxes rates are going?  So is your retirement account at risk to congresses’ need for more tax revenue?

Naturally, you can see that you need to have some money in a Tax Free Bucket.  We can design a plan that gives you Tax Diversification to protect your spendable income in retirement from increasing tax rates.