Lower your Tax Bill and Have More Money in Retirement

Many people will overpay their income taxes in retirement. Why? Because too few people know that future taxes may be reduced with timely and smart tax planning now. I am not suggesting anything illegal or unethical. Everyone should pay their fair share. But unless you wish to tip the IRS, don’t pay more than that. 

Paying more taxes means you have less money overall in retirement. Paying less taxes later means having more left over for you and your family.

Would you be willing to pay a little more now for the potential to pay a lot less later If yes, read on to learn how to save money by developing a Lifetime Tax Strategy.

Why is it so hard to lower your retirement tax bill?

First, few of us really understand our tax return let alone federal and state tax laws. We know that we pay more taxes when we earn more money, but our grasp of important details may stop there. Since we don’t understand taxes, we willingly delegate responsibility to the tax preparer year after year. Be aware, most tax preparers are trained to answer questions and complete your return, not give proactive forward-looking advice aimed at minimizing your overall tax burden.

Further complicating matters, most financial advisors don’t consider tax planning their domain and don’t do it or don’t do it well. It’s hard work, often underappreciated and not nearly as exciting as investing.

With odds stacked against you, how do take appropriate actions now?

Control your retirement income taxes with a Lifetime Tax Strategy

Pursuit of a lifetime tax strategy begins with an analysis of the total amount of taxes you will payduring your retirement. Say you retire at 65 and live to age 90. That’s 25 years of paying taxes, so ask your advisor to calculate a projected tax bill over those years. Then, compare your total tax bill under various alternative scenarios. Depending on your circumstances, it’s possible you could see savings of hundreds of thousands of dollars. Yes, I said HUNDREDS of THOUSANDS of dollars!

Important elements of a Lifetime Tax Strategy include:

  1. Managing RMD’s – First, understand how taxes (and penalties and surcharges) are paid in retirement, especially taxes on Required Minimum Distributions (RMDs) from your retirement savings. RMDs mean that federal law forces you to begin taking money out of your retirement savings at age 72, and to pay taxes on the distributions, even if you don’t need or want to take a distribution. The amount you must take out increases each year. Distributions from your retirement savings count as taxable income, and more income means more taxes.
  2. Avoiding Penalties and Cliffs – Second, be aware that you may pay more for Medicare Parts B (doctor’s and other medical services) and D (prescription drugs) if you have higher income. Depending on your income, you could pay a lot more. With unwanted or larger RMDs, there also may be other financial penalties, taxes and surcharges, especially as Congress looks to shore up Medicare’s financial health and reduce our National debt in the future.
  3. Optimizing Estate Planning and Taxation – Third, develop a multi-generational tax strategy. Due to a recent federal law known as the SECURE Act, tax planning is now more important for our heirs as well. Previously our children or other heirs could stretch an IRA inheritance over their lifetime (and pay taxes slowly), but this is no longer the case. Now, all inherited IRA monies must be liquidated (and taxes paid) within 10 years for non-spousal heirs. For those who inherit large IRA balances, this means that a big tax bill could be due.
  4. Achieving Tax Diversification and Bracket Management – Finally, with proper planning, you may be able to exercise some control of your income tax bracket and rate. By having some money saved for retirement that does not require the payment of income taxes at the time of distribution (like a Roth IRA), you may be able to choose which bucket of money to spend to keep your taxable income below certain thresholds. This is code for paying less taxes over time.

An important note: while it usually is best to begin tax planning before you retire (when you may enjoy more options), starting at any time is better than not starting at all.

Controlling taxes in pre- and early retirement: the silver bullet

If ever there was silver bullet in tax planning, it is the Roth IRA. Unlike a traditional IRA or traditional work-place retirement account, money invested in a Roth account grows tax free and doesn’t ever require distributions. Said differently, with Roth accounts you will pay income taxes at the beginning but never again. Roth IRA funds can be used to reduce taxation over your lifetime through needed tax diversification, and very well may help those who inherit your assets.

To minimize your taxes over the long term, consider maximizing contributions to your Roth IRA or 401k’s Roth account. You also may move some of your traditional IRA funds to a never-to-be-taxed-again account as a partial Roth conversion. As above, you will pay income taxes at the time of conversion, but it may be worth it if it reduces the amount of taxes paid later a lot more. You may be very surprised by the savings!

Again, to do this your advisor will estimate your lifetime tax bill using two different scenarios – with and without Roth conversions – and compare the results. In many cases paying taxes now will yield big savings later, but don’t make guesses. Ask your advisor to make projections.

In the end, the very best strategy is to be pro-active in your tax planning, not reactive as you pick up each year’s completed returns from your tax preparer! An experienced and trusted advisor will work with your tax preparer and help you develop the comprehensive tax strategies that will pay off for years to come. Have questions? Want to learn more? Email Lorie or schedule a no-cost, no-obligation call with her here: https://ScheduleameetingwithLorie.as.me/Gettingtoknowyoucall

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