Tax rates are at a historical low, courtesy of the Tax Cuts and Jobs Act (TCJA) that was signed into law in 2017 by former President Trump. That may change in the near future.
In 2017, a single filer whose taxable income was between $91,900 and $191,649 fell under the 28% tax rate bracket, according to Investor’s Business Daily. A year later, in 2018, after TCJA was fully implemented with a new tax bracket, a single filer whose taxable income was between $82,500 and $157,499, fell under the 24% tax rate bracket.
The tax rates have continued to shrink in all income brackets, including for married joint filers and heads of households. The tax rate for single filers who were making between $85,526 and $163,300 in 2020 was 24%. This year, single filers earning between $86,376 and $164,925 will have a 24% tax rate, per Investor’s Business Daily.
The TCJA is set to expire after 2025; however, with a new administration and mounting national debt, Mitch Lyons, a former NFL player, financial expert and founder of Mitch Lyons Wealth, said tax rates are bound to increase sooner rather than later.
“I foresee taxes going up in the future due to an ever-increasing national debt of $28 trillion,” he said.
President Joe Biden was vocal about raising taxes on the rich while he was running for president. His new official tax bracket has yet to be revealed. Nevertheless, Lyons said he believes the tax rates will increase, which will, in turn, affect people who have 401(k) plans or a Roth IRA (individual retirement account) and are poised to retire soon.
“Ultimately, there is going to be less money for your retirement,” he said. “If your 401(k) is worth $1 million on paper, you really don’t have any idea what that is really worth because you don’t know what the tax rate is going to be when you end up taking that out. You are going to be taxed on all $1 million. If you are in a 25% tax bracket, then you are going to pay $250,000 to the government. But if you are in a 40% tax bracket, you are going to end up paying $400,000. So, you really don’t know how much you have in your retirement account because you don’t know what the tax environment is going to be when you pull that money out when retiring.”
As a result, Lyons said he is advising his clients to seek other options when saving their money for retirement.
“I’m recommending my clients look at investment strategies that mitigate the risk of higher taxes,” he said. “While Roth IRAs are a step in that direction, frankly, I don’t have a lot of confidence that the rules pertaining to tax-free Roth distributions will remain unchanged by Congress. With that in mind, I utilize insurance-based strategies that allow for tax-free policy loans. These insurance-based strategies are a private contract between you and an insurance company, which makes it more unlikely Congress can affect them.”
In addition to steering his clients away from the investment options that are dependent on tax rates, Lyons said investing retirement savings in the stock market also can negatively impact the value of savings because of volatility in the market.
“The pandemic showed us again how quickly our retirement accounts can be decimated by factors out of our control,” he said. “While the market has recovered in record time, it doesn’t lessen the likelihood it could happen again. I utilize strategies that completely eliminate the downside risk associated with the stock market which allows my clients to rest easy knowing that won’t lose value due to things beyond their control such as pandemics, financial crises or market bubbles bursting.”