A Look At Tax Planning For Retirement

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you will likely see a reduction in the amount of taxes you owe after the age of 65, you still need to plan […]...
adam@thrive-funnels.com
April 6, 2021
Home » Uncategorized » A Look At Tax Planning For Retirement

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you will likely see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.   

Social Security Benefits 

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.  

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.  

Other Income Sources 

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.  

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts. 

Strategies to Minimize Taxes 

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.  

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs. Alternatively, you may wish to consider cashing in your traditional IRAs and using the funds to purchase tax-free bonds or a life insurance policy that will provide your heirs with a tax-free inheritance.  

If you are planning to retire soon, consider the tax implications of your income to avoid an unexpected bill from the IRS. For more information, consult your tax professional. 

Additionally, being younger than 59 ½ doesn’t mean it’s too soon to start tax planning. Just being coached on which type of account to hold your invested assets could be beneficial. If you have been investing for a while you likely have a mix of these types of accounts:

  • Taxable – Joint, Individual, Transfer on Death
  • Tax Free – Roth IRAs
  • Tax Deferred – 401k, 403b, Traditional IRAs

Dividends, capital gains, and interest income (bonds, CDs) are taxed differently by the IRS, and this helps indicate which type of account would best hold certain investments. The problem is it’s not always easy to know the right placement for these assets, because of all the variables in your retirement plan. At Plan For Your Goals I will walk you through the ideal strategy and educate you on the tax planning principles you need to know about.

Regardless of where you are on the retirement spectrum, let’s talk about the tax planning you need on the current part of your financial journey. Schedule a call so we can chat.

Copyright © 2018 Liberty Publishing, Inc. All rights reserved. 

Distributed by Financial Media Exchange. 

Get in Touch

Plan For Your Goals Logo

Many have no financial plan for retirement. At Plan For Your Goals, my mission is to help both the newly retired and the nearly retired take control of their finances with an evidence-based plan so they can retire with confidence.

Contact

Branch Office: 5954 E Bay Blvd, Gulf Breeze, FL 32563

(850) 786-3400

david@planforyourgoals.com

Check David's background on FINRA's BrokerCheck

Plan For Your Goals, LLC is a state registered investment adviser. Plan For Your Goals, LLC may only transact business in those jurisdictions in which it is registered or qualifies for an exemption or exclusion from registration requirements. Plan For Your Goals, LLC’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Plan For Your Goals, LLC’s web site on the Internet should not be construed by any consumer and/or prospective client as Plan For Your Goals, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by Plan For Your Goals, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Plan For Your Goals, LLC. A copy of Plan For Your Goals, LLC’s current written disclosure statement discussing Plan For Your Goals, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website or directly from Plan For Your Goals, LLC:  Click here to download a PDF copy.

This website and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This website and information are not intended to provide investment, tax, or legal advice.

Plan For Your Goals, LLC throughout this website has provided links to various other websites. While Plan For Your Goals, LLC believes this information to be current and valuable to its clients, Plan For Your Goals, LLC provides these links on a strictly informational basis only and cannot be held liable for the accuracy, time sensitive nature, or viability of any information shown on these sites.

The SmartVestor program is made up of financial advisors and other investing pros from across the country. SmartVestor is an advertising service that Plan For Your Goals, LLC pays a monthly fee for introduction to potential clients. Our firm utilizes this service as a lead generator. SmartVestor utilizes the “Ramsey Values” and uses the Ramsey Solutions as a paid promoter of SmartVestor Pros. SmartVestor has a vetting process that includes a certain number of years of full-time experience as a registered securities professional, and agreement to the Code of Ethics. Potential clients can use this matching service at no cost.

Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 Copyright © 2023 Plan For Your Goals, LLC. All rights reserved.