It was in 1974 that the IRA was born and we were assured by the government that by putting our money into a retirement plan today, we could reduce our current taxes and pay a lower rate in retirement. Life was simpler then. It was easy to project a lower tax rate because the top tax rates were in excess of 70% and Social Security benefits were not subject to income taxes. Basic common sense told us to put our hard-earned money into tax deferred retirement plans assuming the future tax rate would be lower.

The problem comes when they have to deal with the taxes they have to pay to the government at the end of the year. The laws completely transform for them when they step into this dominion. They need to have professional Accountants for contractors to show them the right way.

Even though property taxes have skyrocketed along with property values, fewer and fewer taxpayers itemize their deductions. This means that for many taxpayers, income taxes are the same with or without deductions. Taxpayers with IRA distributions have to calculate the taxes due on IRA distributions dedicated to the payment of property taxes. Consider several middle class couples age 65 living in Minnesota. Each is retired from a job that has provided a pension. Assume each has nearly identical circumstances with combined Social Security benefits and pensions of $30,000 each for total cash flow income of $60,000 and file taxes as married filing jointly. The only difference in their circumstances is the property taxes of the mortgage free homes in which they live of $1,900, $3,800, $5,600 and $7,400. All other itemized deductions are the same and are not enough to exceed the standard deduction for their age and filing status. Without an IRA distribution and after the standard deduction and exemptions, each would pay federal taxes of $1,595 and Minnesota taxes of $827. Each couple is squarely in the middle of the 15% tax bracket.

These couples live comfortably on the pension and Social Security retirement benefit, therefore each has decided to use IRA distributions for the sole purpose of paying property taxes. The income tax consequence of the distribution needs to be determined and paid. Since each of the taxpayers is in the 15% tax bracket, a simple calculation of the distribution divided by 0.85 should be all it takes to yield the gross distribution required. Yet because of the provisional income test and the lack of itemized deductions, this calculation is anything but simple. We have determined the percentage of federal tax on the distribution is 21.5%, 24.6%, 25.7%, and 26.2% respectively even though none exceeded the 15% bracket even after the distribution. Minnesota has a top tax bracket of 7.85% yet the rate on the distribution is 8.1%, 9%, 9.3% and 9.9% without the proposed increase to state taxes.

Because of the state and federal income taxes, a distribution of $3,000, $6,000, $9,000, and $12,000 respectively are required to net the $1,900, $3,800, $5,600 and $7,400 of property taxes for these couples. The complicated nature of the tax code is itself a crisis, yet a greater problem is that that 100% of these IRA distributions go to the payment of taxes in some form or fashion without any tax relief. Is this the reason for which you saved your money? Making us pay taxes on income use to pay property tax is ruthless. Taxing social security benefits because of an IRA distribution is coldblooded. The solution to this dilemma will have to come in the form of a congressional act changing the tax code. I can think of $Trillions of reasons that Congress will not act to reduce taxes for retirees. Until the tax code changes, financial planning could provide some answers.

The rules of thumb and strategies we learned while accumulating are not effective or can even be harmful when retirement plan distributions begin. The scenario described above is just one of many potential scenarios regarding IRA distributions. Paying for a mortgage with IRA distributions may increase your taxes. Your charitable gifts may fatten the US Treasury rather than reduce your taxes. Expect to see your medical insurance and expenses and long-term care insurance deductions diminish once distributions are a part of retirement income. Today’s retirees need to find a way to get funds out of an IRA without paying excessive taxes. There is not a one size fits all solution for all taxpayers. A qualified fee-only advisor should review the cash flow, income taxes, assets, liabilities, and other personal circumstances of prospective clients. This is not as easy as it might seem. Most advisors use packaged financial planning products primarily designed to sell products. It took the author an enormous effort to develop a program that will determine both the tax on distributions and to compare the current and future cost or benefit of various strategies. At the risk of sounding self-serving, our clients as well as other advisors tell us they have not found a program that quantifies the value of financial advice in such a clear and concise way.

Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Dealing With Forex Market Volatility You have full permission to reprint this article provided this box is kept unchanged.