5 Hidden Ways the Government Takes Money From Retirees 

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Are you aware that the government is taking money from your retirement fund?! 

You may have spent years putting money towards your retirement fund, with dreams like sailing around the world or spending the rest of your years in the countryside. Well, the government has other plans. If you are wondering why your retirement fund is dropping, continue reading. 

1. Taxes on Social Security Benefits

Uncle Sam has been using money from your paycheck for years to support Social Security. When retirement comes, money starts to flow the other way. However, taxes still need to be paid on some benefits.

The Social Security Administration says that as much as 85% of your Social Security payments may be subject to taxation if you have sufficient retirement income. Incomes above $34,000 may face  this rate of taxation.

Joint filers may be required to pay income tax on up to 50% of benefits if their combined income is between $32,000 and $44,000.

2. Required Minimum Distribution (RMDs) That Increase Over Time

The longer you defer taxes in traditional IRAs and 401(k) plans, the more you’ll have to pay when withdrawing the money. However, not everyone realizes that RMDs, based on age, increase as you age. 

As of 2018, the RMD on a $1 million investment was under $40,000 at age 70 and a half. At age 90, it was almost $90,000.

As of June 2012, the RMD age has risen to 72. Regardless of whether the age change took place, you are still stuck with the possibility of ever-growing RMDs as you age. With taxes likely to rise as time passes, you can protect yourself from higher tax rates by investing in a Roth Individual Retirement Account (IRA) or converting an existing traditional IRA into a Roth.

To ensure that your retirement savings are ready and waiting when you need them most, consult with a trusted financial adviser who will help guide you on the right path forward!

3. State-Based Estate and Inheritance Taxes

State-based estate and inheritance taxes are the final indignities to those who have spent decades hoping to build and pass on a financial legacy. You’re left helpless as the federal government reaches into your wallet during retirement.

The amount of everything you own at the time of your death is subtracted from your total estate tax liability. Remember that estate taxes may apply if you accumulate a sizable inheritance. Careful consideration should be taken when allocating assets amongst our beneficiaries, as loved ones may incur tax penalties otherwise. 

If you inherit money, you do not owe state estate or inheritance taxes, but your children or other relatives may. However, these taxes may be assessed in many states even if you don’t possess a significant fortune. The value of an inheritance, in particular $1 million, is when these taxes are enforced. Despite the fact that these taxes are not imposed until an inheritance reaches $1 million in some states, they remain fairly modest.

4. Higher Medicare Premiums

It’s hard to believe that higher-income beneficiaries pay Medicare premiums based on their modified adjusted gross income (MAGI). If you have too much money, your premiums may skyrocket. 

If your MAGI for 2021 were less than or equal to $97,000 for an individual taxpayer, $194,000 for a joint taxpayer, $97,000 for a married taxpayer, and $56,000 for a single taxpayer, you would pay the standard $164.90 Part B premium for common 2023 Part B in 2020. At higher incomes, the premiums would reach a maximum of $560.50 a month if your MAGI exceeded $500,000 for an individual and $750,000 for a couple.

5. Net Investment Income Taxes

Uncle Sam wants to congratulate you for saving enough to build a large nest egg. He does so by skimming a bit off of the top. 

If you meet the requirements, you may receive a net investment income tax credit. The net investment income tax went into effect in 2013 to help fund the Affordable Care Act of 2010. It applies to individual filers who earn more than $200,000 and joint filers who earn more than $250,000.

Net investment income is defined by the IRS as the following but is not limited to:

  • Dividends
  • Monetary gains
  • Royalties and rental money
  • Ineligible annuities

Bottom Line

Facts are the government takes funds from retirees through taxes. Why not stay two steps ahead of them and educate yourself on ways to protect your retirement fund from the government? Federal officials are laying claims on your cash, so equip yourself against these claims for a more prosperous retirement.