Thursday, February 02, 2023

Government Retirement Traps Lurking for Seniors

Beware if you are retired! The Federal government is stealthily working to tax away the money one has saved for retirement.   And no elected official is working to protect seniors from this government ploy.

I retired early at 49.    I didn't become aware of many of the Retirement Traps until I started using some the retirement benefits at 64.    Yes, the federal government provides benefits to senior retirees.  However, the federal government also stealthily reduces the benefits or increases the cost.

Here are a few government retirement trap examples:
  • Tax on Social Security Benefits.   Up to 85% of social security payments can be taxed above certain total income.   The threshhold income  number hasn't been adjusted for inflation since it was implemented in the 1980s.   First, the Federal government doesn't acknowledge that 100% of FICA payments made by an individual has already been taxed.  Thus, the Federal government is taxing the same income twice.  Seems this should have been corrected many years ago, but the Federal government allows this rip off of seniors to continue.
  • IRMMA (income-related monthly adjustment amount).   This is the additional payment one is required to make for Medicare part B premiums based on income.   My response is, "Since when are any insurance premium payments based on one's income?"    Do I pay homeowner/renter insurance based on income?  Do I pay car insurance based on income?   No I pay based on benefits and risk assessment.   Thus, to me, and IRMMA is another stealth tax on Retired Seniors. 
  • RMDs (Required Minimum Distributions from Retirement Accounts).   OK, Federal government expects individuals to save for retirement.  After the individual saves, the Federal government tells them they must withdraw a certain amount a year and pay taxes.   Yeah, the Federal government is so good at managing budgets, they should be allowed to tell all citizens how to manage their retirement accounts. 🤣
  • New Non Spousal Inherited IRA rules.  Inherited IRAs used to have RMDs based the beneficiary's lifetime, which made sense to me.  Now,  most inherited IRA RMDs are based on the decedent's and must be withdrawn within 10 years.  How does that help the beneficiary for retirement.  It doesn't.   In fact, if the inherited IRA is large, the beneficiary will likely be put in a much higher tax bracket during that 10 years.   Who benefits, the Federal government for taxing beneficiaries earlier and at higher tax brackets.
I'm a big fan of maximizing income AND minimizing taxes (both Federal and local).   I do not consider the Federal government my friend when it comes to maximizing my benefits and reducing taxes paid.   More about how I will manage these traps in future posts.

For more on Crossing Generations check back every Thursday for a new segment.

This is not financial nor tax advice. Please consult a professional advisor.

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