The presidential elections have been decided, but uncertainty remains about the post-election outlook for the consequences for retirees and pre-retirees. Much still depends on what happens in the Senate, where the balance of power will depend on two second elections in Georgia. But two major problems arise: taxes and stocks.
Taxes and you
Americans often underestimate the impact of taxes on their retirement income. “Many households may forget that not all of these resources are owned by them; they will have to pay a portion of the taxes to the federal and state governments, ”says a new report from Boston College’s Center for Retirement Research. “Households face taxes on most components of their retirement income: Social Security benefits, disbursements from traditional employer-sponsored retirement plans, and capital gains taxes on any financial assets they sell to support their retirement consumption.”
Financial planners and economists expected taxes to rise regardless of which party won the White House and Senate. The Tax Cut and Jobs Act of 2017 lowered corporate taxes permanently and individual taxes temporarily, increasing the nation’s deficit by hundreds of billions of dollars. Then came the pandemic and the Cares Act, a $ 2.2 trillion stimulus campaign. That money must be paid back and the deficit reduced.
“Almost all individual tax cuts will expire in 2025.”
The biggest elephant in the room – which everyone knows is going to be a problem – is taxes; not only the trillions in debt we had, but 2020 nearly quadrupled our annual deficit, ”said Beau Henderson, chief retirement planning specialist at RichLIfe Advisors in Gainesville, Georgia. to have go up. What I tell clients is that the best thing we can do is stay informed and know the rules. Does this mean shifting 401 (k) s and IRAs? We’re so focused on covid and politics, things that are out of our control, that we don’t focus on things we tackle can check.”
Many financial planners have recommended their clients to perform Roth IRA conversions, while individual taxes have the lowest rate in years. (When you convert a regular IRA into a Roth IRA, those tax deferred taxes are due immediately.) Almost all individual tax cuts will expire in 2025.
While what happens in the next few years will depend on what happens in the Senate, Jeff Corliss, the general manager and partner of RDM Financial Group at Hightower in Westport, Conn., Said that Biden has talked about raising some capital gains taxes. “Does it make sense for us as (financial) planners to take a profit on (shares) when capital gains rise? Is it worth rethinking people’s estate plans? That can certainly affect taxes. Stay tuned.”
Biden also spoke about having tax incentives for retirement plans to encourage more people to enroll, increasing Social Security benefits to recipients between the ages of 78 and 80, Corliss said.
Rebalance your portfolio
The second important thing to watch out for is stocks. At the beginning of the pandemic, the market collapsed but recovered quickly. Since then the market has been going straight up.
“It’s not a set and forget it.”
“People are realizing that market heights will have to fall,” Henderson said. “That can be a problem for people closest to retirement. Think back to 2008, when people lost 40 percent of their wealth. “
“Regardless of who is in power, planners need to make sure that a person’s investment strategy matches his or her current situation, whether he is working or preparing to retire,” said Corliss. “We are rebalancing the investment strategy and are careful and adapt it to the stages of life. It’s not a set and forget it. “
Rodney A. Brooks writes about retirement and personal finances. His column is currently coming in US News & World Report. He has written columns on retirement for The Washington Post and USA TODAY. He has also written for National Geographic, Next Avenue and Black Enterprise magazine. He retired as deputy editor / personal finance and retirement columnist for USA TODAY in 2015.
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