00:00Experts say there is a ticking time bomb coming for many Americans' retirement nest eggs.
00:04But there's still plenty of time to defuse it before it wreaks havoc on the country's
00:07retirement savings.
00:09The time bomb is in the form of the huge tax bill many savers will owe when they start
00:12taking distributions from widely used tax-deferred retirement accounts like 401ks and traditional
00:17IRAs.
00:18And according to IRA expert Ed Slott, that bill is only likely to increase.
00:22As it stands, those who invest in a 401k or traditional IRA don't pay taxes on the contributions.
00:28But that means that the bill will come due in retirement when they withdraw funds.
00:32Because of this, the amount displayed on account statements is far higher than what people
00:35will actually be able to spend on living expenses, says Slott.
00:39And many people don't understand just how much they could owe.
00:42Slott explained,
00:43None of these accounts have been taxed.
00:45That's the deal we made with the government.
00:47We get a tax deduction, but we'll pay for it later.
00:49The IRA is an IOU to the IRS.
00:53And thanks to a soaring stock market, sizable inheritances, and a growing emphasis on investing
00:58early, Americans have an astounding amount of wealth tied up in these accounts.
01:02In the first quarter of 2024, Americans had $7.8 trillion invested in 401ks and $14.3
01:08trillion in IRAs, according to the Investment Company Institute, meaning retirement savers
01:13owe trillions in taxes.
01:15While many people are focused on how they should be saving now, Slott says more need
01:19to start accounting for their tax bill in retirement.
01:21One way to defuse the bomb?
01:23A Roth IRA conversion.
01:25Investors will pay taxes now, but Slott says that's better than waiting with tax rates
01:28being on sale right now.
01:30Although the federal rate maxes out at 37%, many will pay rates as low as 10 or 12%.
01:35We're at the lowest historical rates many of us are likely to ever see, says Slott.
01:40You don't realize how good you have it now.
01:42These are the good old days.
01:45When you convert a traditional IRA to a Roth IRA, you pay the taxes at the time of conversion.
01:50Slott says that while no one likes to pay taxes up front, it's never made more sense
01:53to do so.
01:54In over 40 years, he's never had a client regret a Roth conversion.
01:58As long as you're paying the tax, it will grow for the rest of your life, income tax-free,
02:02he says.
02:04Potential tax law changes make today's rates look doubly good.
02:07While many people expect to fall into a lower tax bracket in retirement, that isn't always
02:10the case.
02:11Slott calls the belief you will be in a lower tax bracket the number one retirement myth.
02:16And depending on the outcome of this year's presidential election, people may see their
02:19tax burden increase if the individual tax cuts from Donald Trump and the Republicans'
02:232017 Tax Cuts and Jobs Act expires after 2025.
02:28Slott also points to the country's current debt level, which sits at more than $35 trillion,
02:33as another reason he believes tax rates will increase.
02:35He argues that the last thing many people want is their retirement savings subjected
02:39to the uncertainty of what tax rates could be in the future.
02:42Either Congress is going to keep kicking the can down the road, or they'll have to raise
02:46taxes, he says.
02:47And the people at the highest risk of getting hit with those taxes are the ones with the
02:50most money in these tax-deferred vehicles.
02:53Other planning options include charitable giving and purchasing life insurance.
02:56Whatever planning savers decide to do now, it's better than standing idly by and getting
03:00a surprise in retirement, he says.
03:02There's an opportunity now to get that money out, says Slott.
03:06After next year, rates are supposed to go up again, so you still have around two years
03:10at the rock-bottom tax rates.
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