Apr 12, 2019 4 min read

As we enter the 11th year of the bull market, some investors are seeing their account balances balloon. This may be creating a quandary. Many investors are troubled by the amount of risk they are taking, but are afraid they will miss out if they exit the market.

Many were spooked by what happened from October to Christmas Eve, when the market experienced a big dip. But it recovered so quickly that some believe this will always happen. This was not the correction, and when the real one comes, it will probably last much longer.

It took 12 years to recover from the crash a little over 18 years ago. There is never a good time to have a market crash, but there is a worse: right before or at the start of retirement. That is when sequential risk could destroy your retirement.

A second potentially major issue is that many people have huge 401(k) accounts and other qualified accounts. Having a large account of non-qualified money would be much better. How can having too much money be a problem? This qualified money can become a tax time bomb.

Conventional wisdom has been that we defer paying taxes on this money as long as possible. We spend non-qualified money first, and keep the tax-deferred account growing.

The problem is, at 70½ we have to start making required minimum distributions. If you had $1 million in one of these accounts, you would have to withdrawal $27,400 at age 70½. The amount you are required to take each year increases slowly. The first few years your account balance may continue to grow.

This will continue to push up your tax bracket, possibly make more Social Security taxable and make your capital gain rate increase. It also can push your Medicare premiums for Parts B & D up to as high as $537.90 each per month. There would be very little you could do at that time to help the situation.

Investors with qualified accounts of several hundred thousands of dollars are probably less at risk. They should discuss this with a tax adviser. Their required minimum distributions will be a lot lower and they may have less income from other sources. Know your situation.

People with big balances in qualified accounts might start taking income from these accounts sooner. They may delay starting Social Security until later, maybe even 70. This would allow them to let SS income grow, which would be tax advantaged because they can receive at least 15 percent of it tax-free. It also will help to keep Medicare premiums lower.

Investors might consider doing Roth conversions while tax rates are lower and before they reach age 65 and go on Medicare. This Roth money will grow tax-free if you have a Roth for at least five years and are age 59½ or older.

Younger investors should consider putting money into Roths at an earlier age. Although you do not get a tax deduction, you also do not pay taxes at withdrawal. Roth owners are not subject to RMD rules. If your 401(k) offers a match, contribute at least enough to get the free money. Free is hard to beat.

A properly constructed life insurance policy could possibly provide tax-free income, not affect your Medicare premiums and not have RMDs. We will revert to the old tax laws in 2025, with their high tax rates, if the law is not extended. That probably would be what happens when you consider the size of the national debt.

Taxes are on sale today, so be proactive and take advantage.

Gary Boatman is a Monessen-based certified financial planner. He is author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.