Your Retirement Tax Rate
Is your retirement tax rate 18% or 80%? After a 3,200-mile trip across America's heartland, the Frank family is proud to report that America (and Manitoba) are doing just fine, in case you thought otherwise.
The striking thing about visiting retired relatives in Canada is that we live largely the same lives, except of course their healthcare is free. You might think they pay more in taxes, but do they really?
The effective tax rate for many Americans, we are told, is somewhere around 18%. That's because about half of Americans pay no income taxes at all. You can just about double that number for the average taxpayer's marginal tax rate. But for retirees, it might be significantly higher. Try 80%.
If you want to retire off $100,000 per year from your IRA, then you'd better gross up your expense by 80% to account for your tax bill. A $180,000 withdrawal in the 35% tax bracket means you'll pay $63,000 in taxes. If your favorite retirement state and city income tax rates add up to 9% or more, then you'll spend more than $11,700 in state taxes and you'll have less than $100,000 to spend from a $180,000 withdrawal. You may need to gross up your retirement income by 80% to pay your retirement taxes.
Find ways to Go Tax Free. Many of us will not retire but maintain some sort of business and/or other income source for the duration of our lives. Many of us do not plan to enter lower tax brackets later in life. Many of us fear the various governments will raise our taxes, not lower them. It's a driving force at A&I Financial Services and it might just be time for you to take action.