Just when you thought your mooching relatives got the message to bug off and let you retire in peace, along comes your dreaded, drooling Uncle Sam, eyes fixed on that seven-digit stockpile it took decades to build.
For generations, $1 million stood as the signifier of a secure retirement and a lofty target to excite workers who otherwise tallied their worth in dollars per hour. But between taxes and inflation, the million-dollar question is just how much value that number holds now.
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Think about it. A cool million today has the not-so-chill buying power of roughly $600,000 and change in 2004. And if you have a traditional IRA account, your withdrawals will be taxed like income — maybe at 24% or 32%. And there goes your nest egg: fried.
But before you delay retirement for another decade, take heart. There are ways to financially turn back the hands of time. While the government holds a massive $35.2 trillion in national debt and politicians hold the promise of sorting out the mega-mess, you hold the potential to keep as much of your money as possible.
The ticking time bomb that ticks off some taxpayers
Because you’re good at eavesdropping at coffee shops, you know the two economists at the next table have differing views on what the crushing federal debt means for taxpayers. One insists it’s not such a huge deal because the government only needs to service its debt, not pay it off. And that will always happen as long as companies and workers contribute money to the system.
“Yeah,” the other says. “But what happens when we hit a tipping point and the whole mess goes into free fall?” Which is when you spit out your espresso and ruin your white shirt.
It turns out both of them have a point. The U.S. debt ticks along like a clock and a time bomb. This precarious balance has defined America from the beginning. In 1791, more than $75 million in Revolutionary War-era debt was acquired, about $2.5 billion today.
The debt also makes for a great rallying point. Even the Patriotic Millionaires (yes, there is such a group) extol paying taxes as “the most basic act of patriotism there is.”
And here you are, having just hit the $1 million mark and feeling anything but warm and fuzzies for the IRS. But that doesn’t mean you have to hand off your taxes in accordance with Uncle Sam’s deepest desires.
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Account for how your retirement account works
The government isn’t neccessarily concerned with maximizing the amount of money you get to keep come tax season. So, it’s in your best interest to fully understand the ins and outs of your retirement accounts.
First, assess what your funds demand tax-wise. “Retirement plan” is a catch-all for many different kinds of savings vehicles and accounts — and the IRS lists at least 15 different kinds.
Because Roth IRA holders use after-tax dollars to fund their accounts, they don’t have to worry about the government taking more when they’re ready to withdraw funds. Traditional IRAs and 401(k)s by contrast use pre-tax dollars. That’s a benefit when you grow the account because it reduces taxable income each year you contribute. But it creates tax obligations when it’s time to spend the money.
Now, manage your tax bracket wisely. Go one dollar in income above $182,100 (based on 2023 IRS numbers) and you’ll pass from 24% to 32%. In other words, that single buck could mean the difference between paying the IRS $43,700 and $58,300 — a sizable difference.
If your $1 million shows continued growth, consider tapping other financial resources before cashing in. Social Security, side hustles and downsizing rank among the popular, proven ways of roping off retirement funds until the opportune time. Beware, though, if you live in one of the nine states where Social Security benefits are taxed.
Finally, make like the rich person you are and consider hiring the right help. A top-flight financial advisor or tax accountant can cost hundreds an hour, but if they use their skills to lower your payments by thousands of dollars, call it a very wise investment.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
