According to financial services company Empower, there are 937,747 Americans who are 401(k) millionaires – a significant 18% increase from last year, with an average balance of $1.14 million in their accounts.
However, retirement tax expert Ed Slott warns that many of these millionaires may not actually be millionaires once taxes are paid. Traditional retirement accounts are tax-deferred, not tax-free, meaning taxes will need to be paid when withdrawals are made.
Slott’s latest book, “The Retirement Savings Bomb Ticks Louder,” emphasizes the tax trap that awaits those with traditional IRAs and 401(k)s. He advises converting these accounts to Roth accounts, where contributions are made with after-tax dollars and withdrawals can be made tax-free after a certain age and time frame.
Slott urges individuals to pay taxes at current low rates by converting traditional accounts to Roth accounts. Waiting to take Required Minimum Distributions (RMD) at age 73 means losing control over tax destiny. The penalties for not taking RMDs are severe, emphasizing the importance of planning for taxes in retirement.
The Bottom Line: Plan for Retirement Taxes
It’s crucial to be prepared for the retirement tax bomb by considering tax-efficient strategies like converting traditional accounts to Roth accounts. The key is to control the taxes you pay to maximize income and minimize tax bills in retirement.
Are you ready for the retirement tax bomb? Share your thoughts in the comments!
Rodney A. Brooks is an award-winning journalist and author, providing insightful commentary on retirement and financial topics. Learn more at www.rodneyabrooks.com
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