We know that too much personal debt can undermine your financial security. What’s less clear is how the national debt can impact your finances.

The total national debt of the U.S. reached $28 trillion as of April 1, 2021—and it’s growing. This equates to over $85,000 for every living person in the U.S.

Historically, the government has taken on new debt aiming to meet the challenges of the times or invest in the future. Few would argue, for example, that it was a mistake to run high deficits during World War II. However, too much national debt can lead to negative consequences on a nationwide scale, and that could impact your personal finances.

1. Higher Income Taxes

Future tax increases may be inevitable. The government needs to collect more revenue if our spending commitments don’t decline. With tax rates on ordinary income and capital gains at historic lows, both are likely to increase at some point in the future—it’s just a matter of when.

Action Steps: Roth IRAs, Roth 401(k)s, and Individual Accounts

Roth IRA accounts get funded with after-tax money, and you don’t get taxed a second time when you take withdrawals for retirement income. If we believe the national debt is going to become an issue (which would lead to higher taxes in the future), then it makes the most sense to pay taxes now, because we assume they will be at lower rates.

If you’re heading into retirement and decide to take a portion of an IRA account and convert it into a Roth IRA, you’ll pay taxes on the conversion. But again, you’ll have a nice pot of money that grows tax-deferred, and you can withdraw it later in retirement with no tax impact. Additionally, if leaving a legacy to heirs is important to you, your loved ones would inherit a Roth IRA tax-free.

A Roth conversion won’t be the right move for everyone, so speaking with a tax professional and your financial planning team before making the decision could be beneficial.

2. Reduced Social Security & Medicare

The Social Security Board of Trustees expects the Social Security Trust's funds to run out of money completely by 2035. This means there’s a high likelihood of reduced benefits going forward. Plus, future medical expenses are a major concern for a lot of people heading into retirement.

Action Steps: HSA Funding, Plan for 2035

The answer could be funding a health savings account (HSA). A lot of people have access to HSAs through their medical plan at work. If you don't, you can also contribute to an HSA on your own if you’re eligible and enrolled in a high deductible health plan.

The reason HSAs work so well is that they’re known as a triple tax-exempt investment: contributions are made before tax, savings grow tax-deferred, and distributions are tax-free as long as they are used for qualified medical expenses. You can plan ahead and avoid unnecessary taxes, potentially saving you a lot of money in the long run.

As for Social Security, you should look ahead now while you have the chance. If you’re not yet retired, you may need to contribute a higher percentage of your income to a retirement account so that your investment portfolio can potentially generate more income for you in the future.

3. Increased Estate Taxes

Estate taxes are another way the government can increase tax revenue. As it stands today, the estate tax exemption limit was doubled through the Tax Cuts and Jobs Act (TCJA) of 2017. However, the TCJA is set to sunset in 2026 pending any legislation passing in the interim. The exemption limit will likely decline in the future, which means more people will be assessed estate taxes when they pass.

At a state level, only a few states right now have inheritance taxes, so more states could also adopt these taxes to increase their revenue.

Action Steps: Planning with an Estate Attorney

Your best bet to combat potential increases in estate taxes is to focus on trust and estate planning with a competent attorney and your financial planning team. They can help you devise strategies designed to help you achieve your legacy goals—from financial planning and investments, to identifying gaps in estate documents and collaborating with an attorney to shore up those gaps.

4. Slower U.S. Economic Growth

As we add more national debt, our interest expenses become higher and higher. This means the government has less money to spend on investments such as education, transportation, and infrastructure—or we pay higher taxes, resulting in less consumer spending. Economic growth will probably slow in the future.

Action Steps: Invest Internationally

For many people, the United States remains the safest country in the world in terms of investment. However, a great hedge when maintaining a diversified portfolio for your retirement could be to invest internationally, depending on your investment goals.

You want to be strategic about where you invest and what funds you invest in. The bottom line is that taking advantage of emerging and developing countries within your asset allocation could make sense depending on your unique portfolio.

5. Higher Interest Rates

As the national debt grows higher, outside investors may perceive U.S. government debt as being riskier. Investors will demand a higher rate of return in exchange for taking on that risk when they purchase our debt. Interest rates on U.S. Treasuries will increase, which will lead to higher costs of borrowing.

Action Steps: Manage Your Liabilities

It’s important during periods when interest rates are at record lows to manage the liabilities on your balance sheet. One of the biggest opportunities may be refinancing the mortgage on your home. If you have student loans, consider refinancing those as well. The bottom line is that you can lock in a lower rate and decrease your liabilities, increasing your cash flow.

Proactive Planning for Growing National Debt

The federal debt is projected to be 102% of the gross domestic product in 2021. That is expected to nearly double to 202% by 2051. This affects both our national economy and our personal finances.

Planning for these possible debt-related consequences today could mean less stress later. If you want personalized advice on how you can work to protect your wealth in pursuit of your retirement goals, contact your financial advisor for a proactive planning approach to your nest egg.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, which is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Doug Kuring

Doug Kuring

Financial Advisor

CFP®, Series 7, 63 Securities Registrations,1 Series 65 Advisory Registration† Doug specializes in retirement income planning, creating goals-based financial strategies, and proactively addressing risks that could lead to financial disaster. Clients benefit from his attention to detail and clear communication style. After graduating college and playing D1 Men’s Lacrosse for Fairfield University, he earned a spot in General Electric’s prestigious Financial...Read More