Taxes and Retirement

Taxes and Retirement

I hate to bring up the nasty subject of taxes but unfortunately it is a subject none of us can escape. Some of you are going to retire in the next couple of years and there isn’t a whole lot you will be able to do to minimize your taxes. However, those of you who have 10 or more years to go may have an option to create a second pension that the government cannot touch.

Most of you know that the money you put in your TSP is not taxed when you put it in. Think of it this way, the government is letting you put that money in now and not pay the small amount of tax that would come out of it now, so he can take big chunks out of your money when you draw it out of the TSP. We like to call the TSP Uncle Sam’s retirement account.

Many will say that taxes will be lower in retirement so if I draw my TSP money out in retirement I will pay less tax. Well, I have a couple of questions for you: 1) Do you have more deductions now or when you retire? For most people the answer is now. By the time you retire the kids are gone and the house is either paid for or so close to being paid for you don’t have that deduction any more. 2) Do you think tax rates are going to go up or down over the next 20 years? Folks, the way the government is using its credit card there is no way any reasonable person would think taxes are going anywhere but up in the future. I mention both of these points to address the myth that taxes will be lower when you are in retirement. I’ve included below the history of tax rates in the US. As you can see, we are very low right now compared to what it has been in the past.

Historical Highest Marginal Income Tax Rates
Year Top Marginal Rate Year Top Marginal Rate Year Top Marginal Rate
1913 7.0% 1946 86.45% 1979 70.00%
1914 7.0% 1947 86.45% 1980 70.00%
1915 7.0% 1948 82.13% 1981 69.13%
1916 15.0% 1949 82.13% 1982 50.00%
1917 67.0% 1950 91.00% 1983 50.00%
1918 77.0% 1951 91.00% 1984 50.00%
1919 73.0% 1952 92.00% 1985 50.00%
1920 73.0% 1953 92.00% 1986 50.00%
1921 73.0% 1954 91.00% 1987 38.50%
1922 56.0% 1955 91.00% 1988 28.00%
1923 56.0% 1956 91.00% 1989 28.00%
1924 46.0% 1957 91.00% 1990 31.00%
1925 25.0% 1958 91.00% 1991 31.00%
1926 25.0% 1959 91.00% 1992 31.00%
1927 25.0% 1960 91.00% 1993 39.60%
1928 25.0% 1961 91.00% 1994 39.60%
1929 24.0% 1962 91.00% 1995 39.60%
1930 25.0% 1963 91.00% 1996 39.60%
1931 25.0% 1964 77.00% 1997 39.60%
1932 63.0% 1965 70.00% 1998 39.60%
1933 63.0% 1966 70.00% 1999 39.60%
1934 63.0% 1967 70.00% 2000 39.60%
1935 63.0% 1968 75.25% 2001 38.60%
1936 79.0% 1969 77.00% 2002 38.60%
1937 79.0% 1970 71.75% 2003 35.00%
1938 79.0% 1971 70.00% 2004 35.00%
1939 79.0% 1972 70.00% 2005 35.00%
1940 81.10% 1973 70.00% 2006 35.00%
1941 81.00% 1974 70.00% 2007 35.00%
1942 88.00% 1975 70.00% 2008 35.00%
1943 88.00% 1976 70.00% 2009 35.00%
1944 94.00% 1977 70.00% 2010 35.00%
1945 94.00% 1978 70.00% 2011 35.00%

So what avenues do you have available to you to save where the taxes won’t bite you in the back side? You have two options really as a Postal employee:

1) Roth RIA or Roth TSP

This is a great way to save money for retirement. You can fund it with after tax dollars and then when you draw it out in retirement there is no tax whatsoever. The downside to the Roth IRA is it is extremely limited on how much you can put in. The limits are $5,500 if you are under 50 and $6,500 if you are over 50. It’s pretty hard to accumulate any sizeable amount of money in a Roth with those kinds of limits. Think about this, the government lets you put $17,500 in an IRA in most cases but he limits what you can put in a tax free vehicle. Interesting huh?

2) Life Insurance

This vehicle has been around for a long time and is still one of the only places Uncle same can’t touch when it comes to taxes. As a matter of fact it’s the only place you can save money with no limit** and it be totally tax free in retirement. Cash value life insurance builds cash value obviously and when you accumulate a large sum of money in a policy you can take the cash out in the form of a policy loan that never has to be paid back. How much tax do you have to pay for taking one of these loans? NOTHING. You would also have to go along with the tax free income a nice death benefit that would take care of you loved ones in the event of your premature death.


An Example

Let’s look at a real example of a Postal employee who wants to set up a second tax free pension. This employee WAS contributing $500/pay over and above his match to the TSP. Let’s look at what happens when he puts this same $500/pay into the cash value policy we suggest and see what happens when he retires in 15 years.

Annual Contribution: $13,000

At age 60 the employee can convert his cash value into an annual 2nd pension of $33,000 a year. Remember, that $33,000 is tax free because it is a loan. None of this money would show up on your tax returns. I don’ t know many people who wouldn’t like to have a second tax free pension. On top of the tax free income you have created you would also have a death benefit of $360,000 at age 60 in case you pass away early. All of those proceeds pass to your heirs tax free as well.


If you would like a custom presentation designed for you based on your age and your retirement date please email me at david@postalbenefitsgroup.net.

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