Gary and 
Karla did everything ‘by the book’ throughout their work lives – they saved diligently in a 401k, rolled that into an IRA upon retirement, and with just over $1.3 million in their account, were told by their advisor that they could take out about $50,000 a year and not likely run out of money for the rest of their lives.
That sounded good. Added to their combined social security benefits of $30,000 – they’d be able to enjoy a comfortable, active retirement on $80,000 a year.
Until – that is – they learned about the secret tax nobody is talking about – the tax on social security benefits, and it’s even lesser known cousin – means tested Medicare Premiums.
Because of the way they had saved (tax deferred accounts) – not what they saved – they had unwittingly fallen into the inescapable tax trap cleverly laid by the government to snare unsuspecting middle-class seniors.
At $50,000 of income from ‘other’ sources (namely, their IRA), 85% of their social security benefits become taxable. That means that for every $100 taken out of their IRA account, they’ll be taxed on $185 – because 85% of their social security benefit is added to their income for tax calculation purposes.
That means additional income taxes of nearly $6,000. And if Gary and Karla had more income, they’d be subject to Medicare premiums that could be up to $7,200/year more – solely because of the sources of their income.
Sadly, those impacted by these tax ‘gotchas’ have few (if any) tax-planning options. Those went away when they transitioned from the accumulation phase – to the distribution phase of their life. And in the ‘transfer’ phase (when their estate passes to their heirs), there are even more tax gotchas lying in wait.
For now – since they have to pay the tax bill – their only option is to modify their retirement lifestyle – the very thing they hoped to avoid with all that sage planning and advice they took over the years.
There are two (and only two) excellent options for doing so – the Roth IRA, and properly structured cash value life insurance.
While Roth IRAs are inaccessible to many, and limited for all, cash value life insurance has virtually no limitations, and is accessible to almost everyone. While it may seem an expensive way to stock away some greenbacks – it is surprisingly cost-efficient, and comes with a basket of other guarantees and goodies that make it quite attractive.
Since neither produces taxable income, any withdrawals will not trigger the taxation of Social Security benefits or drive Medicare premiums. Problem solved.
You have choices now, but won’t have many (or any) in retirement. Pay as much attention to how you invest as you do what you invest in – and you can completely navigate around those retirement tax landmines.
