Mattson Financial Services - July 2018

F I N A N C I A L S E R V I C E S , L L C


July 2018


As the Fourth of July rolls around once again, backyard barbecues and fireworks are on everyone’s minds. But as you celebrate America’s independence, kick back, and relax this summer, there is another firework you’ll want to be aware of: the tax time bomb. What am I talking about? This tax time bomb is not a beautiful display of fire and light in the evening sky. Instead, it’s your hard-earned retirement savings going up in flames due to taxes you could have avoided. It all comes back to your required minimum distributions (RMDs). When you reach age 70 1/2, RMDs become a part of your financial life, year to year. When you haven’t taken money for a long period of time from your IRA account, it can grow to be a very high balance, which in turn means a large RMD value. You could be setting yourself up to pay major taxes for the rest of your life. With proper planning, however, you can defuse this tax bomb and get back to enjoying your summers, and fireworks, for years to come. You won’t have to worry about any looming tax bombs. This is planning that can start as early as the first day you leave the workforce and years before your RMDs officially kick in at age 70 1/2. One thing you can do is to begin converting your traditional IRA money into a Roth IRA. Most people don’t realize that you can convert IRA money into Roth IRA money as long as you’re willing to pay the tax — even in

retirement. The great thing about Roth IRAs is that you won’t have to worry about RMDs at all, since the tax is paid earlier on. How much you will owe on that tax is based on the tax step you’re in and how much money you’re looking to take out over that tax year. If, for instance, you’re in the 22 percent tax bracket (and your income is at about $80,000 per year for individuals), taking more income won’t necessarily bump you into the next tax bracket. Any dollar amount above $82,500 for individuals will be taxed at 24 percent rate, but the rest is still only taxed at 22 percent.

for your income to throw off your Medicare and Social Security in terms of taxes. You don’t want this tax time bomb to go off in your hands. It’s important to discuss your plan with a financial professional. Taking on a tax time bomb on your own can be a huge challenge. As you approach age 70 1/2, plan accordingly and don’t let those RMDs go undistributed. So, this summer, as you watch the red glare from the bombs bursting in the air, don’t let good Uncle Sam treat your hard-earned money as gunpowder for his personal tax time bomb. –Gary Mattson

While planning for the future and RMDs, another thing to be aware of is the potential

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