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Taxes are here to stay. Since the 16th Amendment was ratified in 1913, the federal government has collected taxes on personal incomes. Federal and state income taxes are a major factor in the accumulation of your nestegg, its growth across the years, and the retirement income you intend to derive from it. Hence, tax planning should be an integral part of your retirement plan.
Different assets are given different tax treatment under the Internal Revenue Code (IRC). What is important for your planning is to understand the tax implications of each of your current assets, possible penalties if you use any of these assets too soon, and possible required minimum distributions (RMDs) that the government may impose that could incur taxes at inopportune times. Sometimes it makes financial sense to move funds from one asset type to another for tax related reasons.
What will tax rates be in the future? Is it better to pay taxes now or later? These are other tax questions that impact your retirement plan. We can’t predict what Congress will do in the future in regard to tax rates. But consider this fact: since 1913, the average of the highest income tax bracket (marginal tax rate), per Internal Revenue Service publications, has been 59%. For tax year 2011, the top bracket is 35%. When you consider federal spending in recent years, most of which is not yet paid for, it might be a good bet that tax rates will go up. So conventional wisdom concerning deferral of taxes needs to be questioned, and it may affect the types of assets that you choose to hold.