Higher tax rates are coming in the years ahead — that seems all but certain. Given that prospect, how should you manage your retirement accounts?
At a recent MarketWatch Retirement Adviser event in San Francisco, two experts spoke about strategies to mitigate the negative effect of taxes on retirement savings.
One of the Retirement Adviser panelists said that the likelihood of higher tax rates in the future means Roth IRAs — to which you contribute after-tax money and all distributions, including investment earnings, later come out tax-free — are a good choice for many savers these days.
If there’s uncertainty, Roth IRAs remove the uncertainty of what future tax rates might be.
Unless Congress acts, the Bush-era income-tax rates are slated to expire at the end of 2012, meaning tax rates will rise, with the top income-tax rate jumping to 39.6% from 35% currently.
Also in 2013, a piece of the health-care reform law goes into effect: For high-income taxpayers, that provision means an additional 3.8% Medicare tax on investment income that most people are not that aware of yet. That brings the highest marginal tax rate, for some taxpayers, to about 43.4% before state and local taxes.