Tax Expert Warns of Growing Retirement Tax

Ed Slott, a tax expert with 40 years of experience as a certified public accountant, warns of a “ticking time bomb” that could significantly impact Americans’ retirement savings. This looming threat is the substantial tax bill that savers will owe when they start taking distributions from widely-used tax-deferred retirement accounts like 401(k)s and traditional IRAs. Many people are unaware of the magnitude of taxes they might owe, as these accounts have not been taxed upfront.

“None of these accounts have been taxed. We get a tax deduction now, but we’ll pay for it later,” Slott explains. “The IRA is an IOU to the IRS.”

Americans have trillions of dollars tied up in these retirement accounts, according to the Investment Company Institute, meaning retirement savers owe substantial amounts in taxes.

Slott emphasizes the importance of planning ahead to avoid financial strain later, cautioning, “If you don’t fix this now, you’re going to pay a lot later.”

One effective strategy to mitigate this tax burden is a Roth IRA conversion. While savers will pay taxes now, Slott argues that this is preferable to waiting, especially with current tax rates being relatively low. “We’re at the lowest historical tax rates many of us are likely to ever see,” says Slott.

“These are the good old days.”

A Roth conversion involves moving assets from a traditional IRA to a Roth IRA, with taxes paid at the time of conversion. Although no one likes to pay taxes upfront, Slott asserts it’s a wise choice. “In over 40 years, I’ve never had a client regret a Roth conversion,” he shares.

Furthermore, while high earners are restricted from directly contributing to a Roth IRA, there are no income limits on Roth conversions. “As long as you’re paying the tax, it will grow for the rest of your life income-tax-free,” Slott says.

Growing retirement tax burden

“All that compounding grows in your favor, without sharing with Uncle Sam. That’s your reward for paying taxes now at lower rates.”

Potential changes to tax laws make today’s rates even more favorable. The individual tax cuts from the 2017 Tax Cuts and Jobs Act are set to expire after 2025, which could lead to higher taxes.

Additionally, Slott points to the national debt, which exceeds $35 trillion, as a reason to believe tax rates will rise. “Either Congress will keep delaying the issue, or they’ll have to raise taxes,” he says. “The people most at risk are those with the most money in tax-deferred accounts.”

Recent changes to tax laws also make traditional IRAs less attractive, according to Slott.

Savers are required to start taking required minimum distributions (RMDs) at age 73, which are beyond one’s control. “When you do Roth conversions, you are controlling your tax rates each year,” he explains. “With RMDs, you’re not controlling anything.

It’s a forced distribution.”

Other planning options include charitable giving and purchasing life insurance. Whatever planning savers choose to do now, it’s better than being caught off guard in retirement. “There’s an opportunity now to get that money out,” says Slott.

“After next year, rates are supposed to go up again. So you still have around two years at rock-bottom tax rates.”