During our working and wealth-building years, most investors are focused on minimizing the taxes they pay on their hard-earned assets. But have you considered the impact that taxes may have on your savings once you enter retirement?
You may fall into a lower tax bracket once you stop working full time, but you could still receive a significant amount of taxable income from portfolio withdrawals, pension payments, Social Security benefits or part-time wages. If you’re not careful, taxes could wind up taking a big bite out of your nest egg — just at the time you need it the most. While paying taxes is a certainty, what will happen with our current tax laws is anyone’s guess. With concerns mounting over our nation’s federal deficits and debt, an overhaul of our tax system could mean higher tax rates in the future. The current federal tax rates could be extended again but that is far from certain.
Federal income tax rates are scheduled to jump in 2013, with the bottom (10 percent) rate disappearing and the top rate increasing from 35 percent to 39.6 percent. Starting in 2013, high wage earners — those with wages exceeding $200,000 ($250,000 for married filing jointly and $125,000 for married filing separately) — will also have to pay an additional 0.9 percent in the hospital insurance (HI) portion of their payroll tax, commonly referred to as the Medicare portion.
Also beginning in 2013, a new 3.8 percent Medicare contribution tax will be imposed on the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married filing jointly and $125,000 for married filing separately). That means someone in the top tax bracket could potentially end up paying tax on some investment income at a total rate of 43.4 percent.
The rates that apply to long-term capital gain and qualifying dividends are also scheduled to increase in 2013. The maximum rate on long-term capital gain will jump from 15 percent to 20 percent. Qualifying dividends currently benefit from being taxed at the rates that apply to long-term capital gain but in 2013 they’ll be taxed at ordinary income tax rates.
The uncertainty about these changes may raise some important questions. When should you pay taxes on the money you’re tucking away in your nest egg — now or when you reach retirement? What will your tax rate be when you withdraw your retirement savings? To address these unknowns an investor should have a diversified portfolio because diversification can give investors more options to help manage tax liability.
The last quarter of the year is the perfect time to ask your tax professional or financial advisor about tax planning and this year is no exception.
ICA does not provide tax or legal advice.
Investment Centers of America, Inc. (ICA), member FINRA/SIPC and a Registered Investment Advisor is not affiliated with Home State Bank. Securities, advisory services and insurance products offered through ICA and affiliated insurance agencies are *not insured by the FDIC or any other Federal Government agency *not a deposit or other obligation of, or guaranteed by any bank or their affiliates *subject to risks including the possible loss of principal amount invested.Information provided by Timothy J. Heisterkamp, Investment Centers of America, 115 W. State St. Jefferson; 515-515-386-2570.