As many Americans continue to be concerned about a big market crash or recession, they are increasingly worried about taxes on retirement income from 401(k) plans and IRAs increasing in the future, according to a recent Allianz study.
Seven in 10 Americans (72%) worry that higher taxes in the future will impact their retirement income from tax-deferred accounts, such as a 401(k) plan or an IRA, according to the 2023 Q3 Quarterly Market Perceptions Study from Allianz Life Insurance Company of North America.
“While paying taxes is inevitable, how much we pay in taxes will change,” said Kelly LaVigne, VP of consumer insights, Allianz Life. “And a change in taxes can have a significant effect on your portfolio if you have not incorporated tax strategies into your financial plan and diversified across tax categories.
“For a goal like retirement, you want to diversify your assets across a spectrum of long-term capital gains, regular income, and non-taxable income. This strategy, along with incorporating strategic tax deferral, will help achieve some control over the amount or timing of taxes you will pay.”
Americans want help in reducing tax risk, with 73% saying they would stop using their current financial advisor if they didn’t help them effectively manage taxes on retirement income. More Gen Xers (84%) than Boomers (67%) or millennials (77%) said they would stop using an advisor if they didn’t help effectively manage taxes on retirement income.
Other financial concerns
At the same time, many Americans are also worried about retirement income from tax-advantaged sources like Social Security. The majority (72%) of Americans said they can’t count on Social Security benefits when planning retirement income. Even more (79%), worry about the future of Medicare and Social Security.
While fewer Americans now worry that a major recession is coming than all of last year, 53% of them are worried that another big market crash is on the horizon. This ongoing worry is leading them to hold more money in cash. Most Americans (54%) say they are keeping more money than they should in cash because they’re worried about a recession, the survey pointed out.
“While you might not feel like you’re losing money by holding it in cash, over the long term, you will lose out,” said LaVigne. “Money kept in cash, or in low interest-bearing accounts, isn’t keeping up with the rising cost of living. The idea is to incorporate risk management strategies that may also lower volatility into your financial strategy so that you can invest more confidently and weather market downturns over the long term.”
Addressing clients’ tax concerns
As advisors work with their clients, they can help them consider how their retirement funds will be taxed, said Kelly LaVigne, VP, consumer insights, Allianz Life Insurance Company of North America. This will help clients have a better idea of how much money they will have in actual retirement income.
There are some ways in which financial professionals can help clients control how much money they will pay in taxes, LaVigne said. “Be aware that not all financial professionals are licensed to offer tax advice,” he pointed out. They can provide insight into how diversification can help to alleviate the burden of higher taxes. “If the financial professional does not offer professional tax advice, they can encourage clients to get professional tax advice before making a decision,” he said.
One way is to consider a Roth IRA conversion, LaVigne said. Many Americans save for retirement in tax-deferred retirement accounts like a 401(k) plan or an IRA. But taxes will be due when the clients start withdrawing money to fund their retirement. That pre-tax money can be converted into a Roth IRA, through which taxes will be paid now. “Consult with a qualified tax adviser for help making decisions regarding whether to convert a traditional IRA to a Roth,” LaVigne said.
For clients who want to give to charity, they can use those donations to reduce their tax burden, e.g., a qualified charitable distribution you can draw from an IRA to make charitable gifts. These distributions are not included as adjusted gross income.
A health savings account can also help clients with pre-tax contributions, tax-free earnings potential, and income-tax-free distributions for qualified medical expenses. LaVigne said.
Allianz Life conducted an online survey, the 2023 Q3 Quarterly Market Perceptions Study in August 2023, with a nationally representative sample of 1,005 respondents age 18+.
Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com.
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