Retirement and Taxes
Proper tax planning can help you save money in retirement. When you combine all sources of cash flow in retirement, some retirees find that they may owe more to the government. Your income for retirement may come from multiple types of accounts – trusts, pensions, IRA’s (Roth or traditional) Social Security, annuities, and taxable accounts.
There is a pecking order for which account you want to withdraw from first to minimize your taxes. Even in retirement, everything comes down to the correct timing. Creating a retirement income plan will help you minimize taxes by properly managing your cash flows. The information that I have read online on this topic is very general. There are many important personal considerations that you need to consider.
Here is a list of 10 questions that will help you with your retirement planning:
- What will be your tax bracket in retirement vs. while working?
- Will you be forced to take a large IRA withdrawal at any point in retirement?
- Do you own a Roth IRA vs. a Traditional IRA? What are the benefits to converting to a Roth IRA?
- How will an IRA withdrawal affect your Medicare premiums? What state do you plan on living in retirement and do they count IRAs as assets when applying for Medicaid?
- How much money do you want to protect from Medicaid if you ever need long term care? How important is asset protection for your estate?
- What are the after-tax cash flows required to maintain your lifestyle/budget in retirement?
- How much money do you plan on leaving as a legacy? What types of accounts do you currently own and will you be passing down?
- Will your IRA withdrawals increase your Social Security taxes?
- How is your health and do expect to live long in retirement?
- Are you going to be receiving any significant inheritances while in retirement?
After reading these questions, you may find that retirement planning can be complicated. Tax planning really comes down to your personal circumstances and goals. The general rule of thumb is that you will take money from taxable accounts first. These are the least tax efficient types of accounts.
If you own both a Roth IRA and a Traditional IRA, it’s best to withdraw from the Roth IRA last. These earnings are tax-free and there are no required mandatory distributions. Roth withdrawals do not increase your adjusted gross income (AGI), which keeps Social Security taxes lower. Your beneficiaries will also thank you, because they will not owe any federal income taxes. For IRA withdrawals, I find it’s best to spread them out over time to minimize any large withdrawals. Once you’re older than 70.5, you will be required to take out a minimum distribution.
You have worked hard to save for retirement and you do not want to make a mistake and give away money to the government. Proper tax planning and understanding how your personal circumstances impact your retirement plan will help you minimize your tax burden.
If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.
Please read our disclosure statement regarding the contents of this post and our website as a whole.
Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.
