When it comes to your retirement, is the One Big Beautiful Bill (OBBB) as beautiful as advertised? Maybe not.
Beauty, as they say, is in the eye of the beholder. So are the details. When it comes to taxes, the details of the new law — and the overall cost — might not be what many people hope.
This law came about like a shopper who walks into a store and says, “I’ll take everything” — then they figure out the cost later. You and I wouldn’t do that, nor would any other informed consumer.
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While the OBBB extends the existing 2017 tax cuts and adds new tax cuts (such as those involving tips and overtime), it’s also expected to add $3.4 trillion to the deficitin the next 10 years, according to the Congressional Budget Office and the Joint Committee on Taxation.
At some point in the future — perhaps in the middle of your retirement — there likely will be a reckoning as the nation’s debt grows. To deal with it, lawmakers will need to drastically cut spending or raise taxes.
As you take advantage of today’s tax cuts, you should also think about strategies to reduce your tax bill in the long term.
Stalked by stealth taxes
As people sort through the implications of the OBBB, retirees also need to be aware of what can be considered “stealth taxes” — which aren’t necessarily clandestine but do have a way of sneaking up on you.
These taxes essentially penalize you if you’ve done well financially. Examples of stealth taxes are:
IRMAA. This stands for income-related monthly adjustment amount. It’s an additional charge retirees pay on their monthly Medicare Part B or Part D premiums when their income exceeds specific amounts.
Alternative minimum tax. Tax law includes plenty of ways to lower your tax bill, but the federal government wants to make sure high-income earners reduce their taxes only so much.
This is where the alternative minimum tax comes in, making sure those taxpayers pay at least some taxes.
Tax on Social Security. Even Social Security benefits don’t escape taxes if your income exceeds a specific amount.
For single filers, 50% of your benefit is taxable if your taxable income is from $25,000 to $34,000, and 85% is taxable if your income is $34,001 or more.
If you’re married and filing jointly, 50% is taxable if your income is from $32,000 to $44,000, and 85% is taxable if your income is $44,001 or more.
Wait, doesn’t the OBBB end the tax on Social Security benefits?
Not exactly. The bill temporarily provides eligible taxpayers who are 65 and older with an additional $6,000 deduction, which could drop some people below the income levels that trigger the Social Security tax.
However, not everyone qualifies for the deduction, which is phased out for individual taxpayers with modified adjusted gross income above $75,000 and for joint filers with income above $150,000.
Even those who qualify have a limited time to take advantage of the deduction, which ends after 2028.
Being proactive on tax efficiency
Like most people, I don’t mind paying less in taxes, but I’m also mindful that it’s a good idea to consider making use of today’s tax cuts to protect yourself in the future, when the tax situation could be very different.
Being proactive is essential.
The average person can’t control what tax laws say — or the fact that those laws could change at any time. You can take steps to reduce your future tax bill within the limits of existing laws.
A few actions you can take to put yourself in better shape when retirement arrives include:
Convert tax-deferred accounts to a Roth IRA. One of the best ways to reduce your tax liability in retirement is to convert your traditional IRAs or 401(k) accounts to a Roth IRA several years ahead of retirement.
Those traditional accounts were tax-deferred, meaning you didn’t pay taxes on the money you contributed. But you’ll be taxed when you withdraw the money.
After you turn 73, required minimum distributions (RMDs) kick in, forcing you to withdraw a certain percentage annually whether you want to or not.
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With a Roth IRA, you’ve already paid taxes on the money you contributed, so those accounts grow tax-free, and you don’t pay taxes on your withdrawals.
There are also no RMDs. If you transfer money from a tax-deferred account to a Roth, you’ll pay taxes when you make the conversion.
For most people, the advantages outweigh the disadvantages. Ideally, you would make the conversions when the market is down, paying taxes on the lower value, then benefiting when the market rebounds and your balance grows in a tax-free account.
Contribute to a Roth 401(k) at work. Many employers have offered traditional 401(k) plans as an employee benefit for decades, but now Roth 401(k)s are an option at some workplaces.
Take advantage of this option if you have it. You don’t get the immediate, short-term tax advantage that a traditional 401(k) provides, but you have the long-term advantage that your money will grow tax-free.
Contribute to a health savings account. An HSA is a way to save money to pay for out-of-pocket medical expenses, especially when you have a high-deductible health insurance plan.
Beyond helping you save for unexpected health costs, an HSA also comes with tax advantages. When you contribute to an HSA through payroll deductions at work, you aren’t taxed on the portion of your income that you contribute.
You can also earn interest tax-free on the money in the HSA, and you don’t pay taxes when you make withdrawals (as long as the money is used to pay for qualified medical expenses).
If your employer doesn’t offer an HSA, you can open one outside work if you have a qualified health plan. In that situation, you’d contribute after-tax dollars to the HSA, then claim that contribution as a deduction on your taxes.
As you look to the future and plan your retirement, it’s best to work with a financial professional who has experience and understands the nuances of when and how to put these strategies into play.
It’s key to take control of your tax situation now — before the rules change yet again.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
