Louisville Medicine Volume 62, Issue 2 | Page 28

Ticking Time Bomb of Taxes By: Calvin R. Rasey Do you realize as a high income earner, with a substantial retirement portfolio, changes in the tax laws may not only take a toll on you today, but also erode your income when you retire? Like most physicians your retirement portfolio is probably a mix of assets that fall into three buckets. 1. Tax-deferred contributions which are made up of pre-tax dollar investments in qualified plans such as IRA’s, 401(k), 403(b), profit sharing or other types of pension plans. 2. Tax-advantaged investments which are made up of after-tax dollars invested in municipal bonds, annuities or Roth IRA’s. However most can’t utilize Roth IRA’s because if your annual earning exceed $127,000 individually or $188,000 jointly, you are ineligible 3. Taxable investments which are made up of after-tax dollars invested in stocks, bonds, and other investments. Unlike tax-deferred contributions, this category/bucket has no contribution limits. As Congress pushed through the American Tax Reconciliation Act most physicians didn’t realize how deeply this would impact them with the potential loss of income, which in turn may lead to having less to invest for retirement. For those physicians earning above $400,000 ($450,000 jointly) federal taxes increased 4.6%. Along with that increase, for those same high income earners, long term capital gains and qualified dividends jumped 5% from 15% in 2012 to 20% in 2013. Personal exemptions have also been reduced by 2% for each $2,500 dollars that your income is above $250,000 ($300,000 for joint filers.) If you think that hurts, for those whose income exceeds $372,501 ($422,501 for joint filers) your personal exemptions are fully phased out. This is on the heels of 80% of itemized deductions also being phased out. Another fact to consider is a new surtax on unearned income for Medicare contributions. In 2013 this new tax of 3.8% will be assessed on the lesser of net investment income or modified adjusted gross income (MAGI) above $200,000 ($250,000 for joint filers.) Many physicians are going to feel the sting of the possible 13.49% tax increase along with the phase-outs of itemized and personal deductions. The government hasn’t given anything; we still have government restrictions on tax-deferred qualified plans. After-tax dollars invested in stocks, bonds, and mutual funds are subject to higher tax brackets than in 2012. This means that the tax-advantaged category/bucket loses some of its appeal because of the new federal tax. Those are things that take a toll on your net income today, but what does that mean for your income when you retire? Let’s look at our three buckets at retirement age: 1. 2. 3. 4. Tax-deferred dollars become taxable. Taxable investments are subject to higher capital gains. Tax-advantaged investments could trigger up to 85% of social security benefits being taxed. Tax-advantaged investments could trigger an increase in Medicare Part B cost from $105 to $336 per month. Also don’t forget about the potential tax exposure at age 70 ½ when you must take your required minimum distribution from those tax deferred accounts. What’s the solution? Maybe adding an additional bucket to your portfolio. One that could not only help you today but also tomorrow. By adding life insurance to your portfolio, you can help protect your savings and gain these advantages: • • • • • • • • An income tax free death benefit for your beneficiaries. Tax-deferred growth opportunities. No retirement contribution limit. Tax-advantaged source of retirement income. No penalties for cash values taken before age 59 ½. No impact on your social security benefits. No effect on Medicare Part B. No required minimum distribution. Many in the medical community today are spending more hours seeing patients or doing procedures but the increase in activity may not be reflected in the paycheck. With the ever-changing world of reimbursements and the rise in taxes, supplementing ones current retirement plan with life insurance could play a significant role in planning for retirement. Proper planning can provide meaningful benefits today as well as in the future. Each individual has a specific retirement need and all retirement plans should be carefully tailored by an experienced team of advisors. Remember the words of Winston Churchill, “Failure to plan is planning to fail.” Sources: Internal Revenue Procedures 2011-52; American Taxpayer Relief Act; Economic Growth and Tax Relief Reconciliation Act of 2001; IRC Sections 1,86,1411,3101; Medicare.gov, Part B Premiums Calvin R. Rasey President of Physicians Financial Services II, LLC (502) 893-7001 – [email protected] Securities Offered Through Securities America, INC.*Member FINRA/SIPC· Calvin R. Rasey· Registered Representative Advisory Services offered through Securities America Advisors, INC.·A registered Investment Advisor· Calvin R. Rasey· Investment Advisor Representative Physicians Financial Services II, LLC and Securities America Company are NOT UNDER Common Ownership. Securities America and its representatives do not provide legal or tax advice. Please consult with appropriate professionals regarding your specific situation.