Tax Planning Can Help Preserve Your Retirement Income.
Taxes may affect your retirement income—and differently than you might expect.
Tax planning for retirement means looking at your finances—present and future—in a new light. For most of your working life, you’ve probably been in earning and saving mode. Once you retire, that sometimes switches to spending mode, where the tax implications can be different. Some critical considerations include:
- How taxes on Required Minimum Distributions could affect your cash flow.
- How the timing of when you take your Social Security benefits could increase your taxes.
- How taxes can affect your Medicare benefits.
- How the IRS taxes different types of income.
Unexpected post-retirement taxes can catch you off guard with costly rates that cut into your retirement income. Imagine being taxed on up to 85% of your Social Security benefits. That’s a possibility some retirees could face depending on when they use their different types of retirement income sources. We can help you create a plan today that is designed to avoid tax bill surprises down the road.
Required Minimum Distribution Calculator
This is the fair market value of your traditional IRA accounts on 12/31 of last year. You can look at your year-end statement for that value. If you took a Qualified Charitable Distribution,speak with a tax advisor about how to calculate your RMD.
Estimated Rate of Return
Your required minimum distribution is affected by your future account balances, which are in turn based on the estimated rate of return on your account. Please input what you believe your possible rate of return on your account will be going forward. Your rate of return cannot be predicted with any certainty and is based on the types of securities that you hold and the respective performance of those securities. Please keep in mind that the actual rate of return may differ greatly from your input, including potential loss of principal due to market fluctuations.
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Why Start Tax Planning for Retirement Early?
Unless you have unlimited financial resources, you can’t really effectively plan for retirement unless you can anticipate your income. And you can’t do that without taking taxes into account.
There’s another reason to begin tax planning for retirement now: planning ahead can help save you money. Tax planning for your retirement can help you determine when to utilize your tax-deferred accounts to alleviate tax burdens, and help you make an informed decision about when to take Social Security benefits.
When planning for taxes on your retirement income, we generally recommend that you:
- Plan your 401(K) distributions with income and taxes in mind.
- Think about converting your IRAs into Roth IRAs. Timely conversions may help to reduce and better manage future taxes.
- Determine the tax implications of Required Minimum Distributions.
- Decide what order to tap your taxable, tax-deferred, and tax-free assets. Taking as little as a thousand dollars from the wrong account at the wrong time could increase your taxes substantially.
- Manage your income by knowing your tax bracket and the steps that may be available to prevent you from moving into a higher income bracket.
- Create a Net Unrealized Appreciation (NUA) strategy in order to get the most out of your company stock.
- Consider how your income could affect your Medicare and Social Security benefits.
That last suggestion may not seem to be related to your income tax, but we believe it’s an important consideration. Your income will affect your Medicare premiums and determine the rate at which your Social Security benefits will be taxed. Withdrawing money from your pre-tax assets can increas your income and push you into a higher tax rate, where as much as 85% of your Social Security benefits could be taxed.
We can help you with a tax planning strategy that is designed to help maximize your retirement income and help make your retirement assets provide as much income as possible for as long as possible.
Let Us Help You With Tax Planning for Retirement.
Download our free retirement planning guide.
We believe the best retirement plan addresses your unique needs and includes a customized strategy to fulfill those needs as well as a plan to help protect your retirement savings. That’s what we do at Retirement Planners of America.
Let us help you with your retirement tax planning. Schedule a meeting with a Retirement Planners of America advisor.
Protect Your Lifestyle by Managing Taxes in Retirement.
Managing your income tax in retirement can be an overlooked opportunity to help maximize your retirement income. Your retirement lifestyle usually depends on your income. Once you’re retired, you generally have fewer options to adjust that income.
Your Social Security and any pension benefits are fixed income sources. You can’t control the stock market or your rate of return, so you can’t count on increasing your investment income. These are all things you don’t have control over…but you DO have some control over certain aspects of your finances. You can:
- Utilize an investment strategy that is designed to protect your investments from down markets.
- Decide when to take Social Security for the greatest benefits to you and your family.
- Plan how and when to tap different types of assets.
- Create a strategy for managing taxes in retirement.
Not having a strategy to minimize your taxes could result in significantly less income to live the retirement lifestyle you want.
Ease Your Tax Burden in Retirement.
Taxes can take a big bite out of your retirement income. The IRS will currently tax 50% of your Social Security benefits if your provisional income is between $32,000 and $44,000. If you are fortunate enough to have more than $44,000 in provisional income, the IRS will currently tax 85% of your Social Security benefits.
You can help protect your lifestyle by creating a plan that proactively manages your income and your income tax in retirement. Here are some steps you can take to get started:
- Plan when to withdraw income from your taxable, tax-free, and tax-deferred assets.
- Choose investments designed to reduce your tax burden.
- Time and group your deductions. If you know your income will change at a given point, you can time your deductions accordingly. Grouping deductible expenses (e.g. medical costs) into one year may also help, as you can reach a threshold that gives you increased deductions.
- Remember to account for your Required Minimum Distributions after age 72.
Prepare for Your Required Minimum Distributions.
Required Minimum Distributions can have a big impact on your income tax in retirement. The IRS currently asks you to begin taking Required Minimum Distribution from your tax-deferred retirement accounts at age 72, and the percentage you must withdraw gets larger each year. To address this issue, you can include these withdrawals in your retirement income plan to lessen the likelihood of possibly being bumped into a higher tax bracket. If they do, you may want to reduce the balances in your IRAs and 401(k)s while you’re in a lower bracket by making withdrawals before you are required to do so. Keep in mind tax brackets do change over time, so we recommend you continually review your plan to make sure you are still on track to reach your goals. Of course, consulting with a certified tax professional is always a wise choice as well.
Download our free guide on taking your Required Minimum Distributions.
Get Help with Managing Taxes in Retirement.
We believe planning your distributions, choosing the right investments for you, timing your deductions, and preparing for your Required Minimum Distributions are good first steps in developing your retirement tax plan. But it’s also important to understand that your tax exposure can change throughout your retirement in response to your personal financial situation, economic influences like inflation, and any relevant changes in the tax code. This can be lot to keep track of! We believe your retirement plan should preserve your income and help protect your investments so you can maintain your lifestyle. Retirement Planners of America can help. Our process is designed to consider your entire financial picture. Schedule a meeting with a credentialed advisor at Retirement Planners of America to discuss strategies designed to help minimize your taxes, protect your assets, and help make your retirement income last as long as possible.