One of my best friends is facing retirement and isn’t quite sure he’s ready. He has spent his career paying into the Social Security system, so he will have that income; and he has an employer sponsored 401K, his own Individual Retirement Account and some other moderate investments. That should be enough, right?
My friend is nearly 65 and has had a successful career. As an unmarried man, his retirement assets will leave him quite comfortable, and the Federal Government smiling each year at tax time. Once he starts drawing on his pension and Social Security his taxable income combined with his investment income will push him into a higher tax bracket. The dividends and interest from his investments will be eaten up by taxes as will about 50% of the income from his pre-tax IRA.
That’s the nature of Social Security, IRAs and 401Ks. They are revenue generators for the IRS because throughout the years of his career, my friend and his employer funded them with pre-tax dollars. The way the tax system works, along with required minimum disbursements from retirement accounts and Social Security, you could end up paying a higher tax rate and then have very little left for your children or grandchildren. The higher tax rate and minimum disbursements eat through those accounts quickly.
Although Social Security ends when you die, your retirement accounts can be passed on to your heirs, but with heavy tax burdens. Depending upon what is left, the estate tax could overburden your heirs, and if they are planning to use the retirement accounts to pay the estate taxes, that in itself could be a problem.
There is a way to eliminate the heavy tax burden of estate taxes on your retirement accounts. A Whole Life policy will allow you to pass benefits to your heirs without any estate tax added, and allow them to use the benefits in any way they wish. Not only are the benefits passed on to your heirs tax free, but the policy also grows cash value during your lifetime that you can use if necessary to help meet your financial goals, while you’re living.
Get your retirement questions answered by calling an AC Financial Adviser at 800-564-3136.