When 2015 arrives, Americans 50 years and older will represent 45% of the U.S. population, projects AARP. Americans 55 years or older will control 75 percent of the U.S. wealth, per ICSC. All will pay substantial taxes, much of which can be avoided with careful planning. —
Industry research organization The Investment Company Institute reports that “Total U.S. retirement assets were $24.0 trillion as of June 30, 2014, up 2.8 percent from $23.4 trillion on March 31, 2014. Retirement assets accounted for 36 percent of all household financial assets in the United States at the end of the second quarter of 2014.” As a result, tax issues loom large.
“The baby boom generation is moving into retirement with something no other generation has had: huge tax liabilities,” reports Reuters. “With savings concentrated in tax-deferred retirement accounts like 401(k)s or individual retirement accounts, many boomers will have to pay income taxes on most of the money they live on. In addition, they are likely to find a high percentage of their Social Security benefits taxable.”
To prepare boomers for retirement, most retirement planners focus their energies and advice on how to ensure savings, asset growth and lifelong income provided via various investment vehicles and insurance products. No doubt that’s a fundamental first step, but it’s only half the battle. The victory will be pyrrhic if combined federal and state taxes wipe out the hard-earned gains.
Redondo Beach-based Peter Vlahakis, a financial services professional of nearly three decades, cringes when hearing the words retirement and taxes in the same breath. “There are so many traps for the unwary, and so many tax time bombs ticking with today’s retirement plans, that the average retiree cannot possibly go it alone. Little do they know that each year dozens of new tax regulations, deadlines, and penalties are enacted into law. The unknowing will suffer accordingly.”
“With the possible exception of home property,” says Ed Slott in his bestselling book, “The Retirement Savings Time Bomb,” the “most valuable asset for most Americans is their retirement fund. Yet most people don’t know how to avoid the costly mistakes that cause a good chunk of those savings to be lost to needless and excessive taxation.”
When retirement kicks in, retirees quickly realize their IRAs, TSAs, 401(k)s and other qualified retirement plans represent their largest asset. The amount of savings that reside in those plans represent the source of their survival and the source of their level of comfort of living. When a big chunk of it gets paid over to Uncle Sam, that cuts to the bone for many.
In an article, “Ticking Time Bombs in IRA Planning for Professionals” offered by the Journals at Marquette Law Scholarly Commons, attorney Jack E. Stephens writes: “Individual retirement accounts (IRAs) are now a significant, if not the most significant, part of a client's estate. Professional estate planners must familiarize themselves with the multifarious rules that affect IRAs and take into account basic planning requirements to avoid potential catastrophic tax traps for the client and liability for the advisor.”
“Getting professional advice early is the best course,” offers Mr. Vlahakis, “though it is never too late. Many people have excessive college-guaranteed debt, allow their employers to dictate what happens to their 401(k)s despite not having a fiduciary duty to protect an individual worker’s best interests, and don’t give carful thought on how and when to rollover 401(k) monies to IRAs – despite all being crucial decisions that equate to dollars kept and dollars lost. IRA rules can be complex. Failing to properly follow transfer rules, distribution rules and rules regarding inherited IRA’s can result in unintended taxes and possibly stiff penalties, as high as 50%.”
It never was easy to do taxes. That is one constant that has not changed. Anyone thinking of retirement would benefit by defusing the ticking time bomb beginning today.
Peter Vlahakis has over three decades in accounting and financial services. After earning his degree in Accounting from San Diego State University, Peter spent the next seven years in public accounting followed by five years as Chief Financial Officer of an engineering firm. In 1986, he was a founding partner becoming CEO of a financial services firm that evolved into Applied Concepts Financial. Peter designs and helps implement custom tailored retirement, estate and business transition plans for individual clients and business owners. Peter has designed proprietary financial programs as well as a product offered by a large insurance company.
Name: Peter Vlahakis
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Organization: Applied Concepts Financial
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