No one can predict the future. But we can make some good guesses!
With the 2020 election coming full-steam ahead, it’s as good a time as ever for retirees or near-retirees to consider their tax strategy. That’s because things may radically change should a new president be elected.
Even if that turns out not to be the case, will your retirement taxes stay the same, or could there be more changes coming?
Right now, up to 85% of your Social Security income can be taxed. The issue, of course, is that many believe Social Security will be depleted by 2035.
If a reelection occurs, the current administration may consider cutting the Social Security employee contribution rate. While this may be yet another tax cut benefiting the middle class, it could also be viewed as an effort to end Social Security completely and take away benefits from the elderly and disabled.
If a new president is elected, the most likely result is that Social Security will expand and continue. Many party leaders have proposed a payroll tax that will pour more money into Social Security benefits.
But what will that mean for the Social Security income taxes you pay in retirement? For wealthier retirees, it could mean more taxes coming due. For lower-income retirees, it could mean better benefits and more protection from these taxes. The middle is in flux. Only time will tell for certain.
The same goes for your pension taxes, IRA, or 401(k). Since these are generally taxed as ordinary income when you make withdrawals, the amount you pay will be decided by the current income tax rates in the year you make withdrawals.
The SECURE Act made a huge change in retirement by raising the required minimum distribution age to 72. That means retirees turning 72 in 2020 or later don’t have to start taking withdrawals and paying taxes on them until they reach that age, which could mean less lifetime taxes overall.
If we see a new president in November, it’s probable that at least some elements of the Tax Cuts and Jobs Act, and maybe even the SECURE Act, will be walked back. For retirees, that could mean more retirement taxes. The question of how much probably depends on how much income you make.
No matter the case, retirees should consider taking advantage of tax rates as they are now.