Taxes are often overlooked when considering retirement income and budgeting. Just as you need a tax strategy in place when you are accumulating savings, you also need a tax strategy for retirement.
There’s a serious flaw in many retirement plans, as reported in to Kiplinger’s article, “Keep More of Your Retirement Savings with Tax-Bracket Planning.” People are so busy focusing on saving money, watching their nest egg grow and considering where they want to live during retirement, they forget to address the problem of taxes during retirement.
It’s not just about how much money you’ve saved for retirement, it’s how much you get to keep after taxes.
To optimize your savings, you need to build a tax-efficient portfolio. It should contain the following:
- Tax-efficient investments. These are investments with the lowest taxes compared to their interest or dividend income;
- Tax-efficient withdrawal strategies. Use differently taxed accounts that offer flexibility for income purposes; and
- Tax-efficient planning. Get a long-term tax plan that focuses on lower taxes over your entire retirement, not a given year.
Don’t Pay Triple Taxes. Retirees who don’t plan effectively for distributions from IRAs or other qualified plan distributions could easily pay three times their tax rate. You can avoid this by taking control over how much income you pay yourself. Your spending needs may be less, so you can keep that amount low by managing your income sources effectively to get the most tax efficiency over your lifetime.
Understand Your Tax Bracket. As a retiree, you need to stay within the 15% tax bracket for the rest of your life. Effective tax planning must begin in your first year of retirement. Don’t assume your tax plan is ideal if you don’t “fill” the entire 15% tax bracket in your early retirement years. The goal is to “fill” every retirement year with taxable income to the upper limit, even if you don’t need that income.
There are other ways that you can minimize your tax liability. A few additional ideas: withdraw cash on a tax-free basis in the form of loans from a universal life insurance policy, if you need more income. Consider a home equity line of credit—the interest is tax deductible. An estate planning attorney at Cottrell & Jacobs with experience in tax law will be able to help you devise a tax-efficient retirement plan that complements your estate plan.
Reference: Kiplinger (July 2017) “Keep More of Your Retirement Savings with Tax-Bracket Planning”