Do You Have a Retirement Tax Strategy?

Mike Gann Tax Planning

They say death and taxes are the only certainties in life. You may not be able to control when you pass away, but you can certainly implement a plan to reduce your tax exposure. While taxes are a substantial expense throughout your life, they can play a big role in your retirement.

Many retirees forget to budget for taxes. Or they may assume that because they are no longer working, taxes will no longer be a sizable expense. The truth, though, is that you will likely face taxes on a number of different sources of income, from Social Security to retirement account distributions and more.

If you don’t have a plan in place, your tax obligation could threaten your financial stability in retirement. Below are a few questions to ask yourself as you develop your tax plan:

 

What is your potential tax exposure?

The first step is to analyze just how your income may be taxed in retirement. Not all retirement income is taxed the same. Distributions from traditional IRAs and 401(k) plans are taxed as ordinary income. Roth distributions are tax-free, however, assuming you are over age 59½ and the account has been open at least five years. Annuity income may or may not be taxable, depending on whether the funds are growth or principal.

Even Social Security benefits are taxable. You can be taxed on as much as 85 percent of your Social Security, depending on your combined income.1 The higher your retirement income, the more tax exposure you face on your Social Security benefits. A financial professional can help you analyze your income sources and estimate your potential tax burden.

 

Have you included taxes in your retirement budget?

Do you use a budget? Have you developed a projected budget for your retirement? A budget is a helpful financial tool at any stage of life, but it’s especially useful in retirement. You can use it to make smart purchasing decisions and gauge whether you’re on track with your strategy. Unfortunately, most Americans don’t use a budget. A recent study found that only 41 percent of Americans rely on one.2

If you haven’t used a budget in the past, now may be the time to start. Include taxes as a fixed expense and deduct them from your projected income. That will give you a better idea of how much money you’ll have available to cover your other bills.

 

Will you have tax-free income sources in retirement?

It’s possible to generate retirement income that isn’t taxable. You can take tax-free distributions from a Roth IRA, assuming you’re over age 59½ and the account has been open at least five years. If most of your assets are in a 401(k) or a traditional IRA, you may want to consider a conversion to a Roth.

Municipal bonds and even life insurance can also be sources of tax-free income. If you haven’t developed potential tax-free income sources, now may be the time to do so. A financial professional can help you analyze your options and create a strategy.

Ready to plan ahead for taxes in retirement? Let’s talk about it. Contact us today at Advantage Retirement Services. We welcome the opportunity to help you implement a tax management strategy. Let’s connect soon and start the conversation.

 

1https://www.ssa.gov/planners/taxes.html

2http://money.cnn.com/2016/10/24/pf/financial-mistake-budget/index.html

 

 

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