Apr 12, 2019 3 min read

Your Financial Future

As we enter the eleventh year of the bull market, investors are seeing their account balances balloon. This could be causing two major problems. Many investors are troubled by the amount of risk they are taking, but they are afraid they will miss out if they exit the market. Many were spooked by what happened last October to Christmas Eve when the market suffered a big dip. However, it recovered so quickly they think this will always happen. This was not the correction and when the real one comes, it will probably last much longer. It took twelve years to recover from the crash a little over eighteen years ago. There is never a good time to have a market crash, but there is a worst time. That is right before or at the start of retirement. That is when sequential risk could destroy your retirement.

A second major potential issue is that many people have huge 401(k) s 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 keep deferring paying taxes on this money as long as possible. We spend non-qualified money first and just keep the tax deferred account growing.

The problem is, at 70 ½ we have to start making required minimum distributions. If you had a million dollar in one of these accounts you would have to withdrawal $27,400 at age 70 ½. 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 SS taxable and make your capital gain rate increase. It can also push your Medicare premiums for Part B & D up to as high as $537.90 each per month. There is very little you can 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 their tax advisor. Their RMDs 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 is tax advantaged since they can receive at least 15% of it tax free. It will also help to keep Medicare premiums lower.

Investors might consider doing Roth conversions while tax rates are lower and before reaching age 65 and going on Medicare. This Roth money will grow tax free if you have a Roth for at least five years and are age 59 ½ or older, Younger investors should consider putting money into Roth’s 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 the 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 revert back to the old tax laws in 2025 with their high tax rates if the law is not extended. That will probably be what happens when you consider the size of the national debt. Taxes are on sale today, so be proactive and take advantage.