Retirement Tax Planning Opportunities

Pre-retirees are often focused on how much money that they’ll be able to draw for their retirement income, but how much you can spend will depend on how the withdrawals are taxed.  Incorporating sophisticated tax planning into your retirement income plans can offer some opportunities to save a substantial amount of taxes.

Most couples with retirement income of over $44,000 will find that 85% of their Social Security benefits are taxable.  Determining the best time to start drawing Social Security benefits involves many variables, one of which is taxes.  Delaying Social Security benefits may allow you to stay in a lower income tax bracket and that can open up other tax planning options.

For married couples, the 15% federal income tax bracket covers income up to about $95,000 when you factor in the standard deduction and personal exemptions.  For itemizers, it can go even higher.  One of the benefits of staying in the 15% bracket is that dividends and long-term capital gains can be free of federal income taxes.

At age 70, there is no longer any benefit to delaying Social Security benefits (prior to then, the benefits increase by 8% each year that you delay) and at age 70 ½ you become subject to Required Minimum Distributions from most retirement accounts.  The addition of this taxable income can drive many retirees into a higher tax bracket and result in their retirement account distributions being taxed at 25% or higher federal rates.  The ability to make partial Roth conversions in your 60’s when you may be in a lower tax bracket can be a great opportunity to save significant tax dollars.

If you have a tax deferred annuity you’ll want to carefully plan how to take withdrawals from it.  These are often expensive, poor performing investments but cashing them out can result in substantial taxable income that could drive you into a high tax bracket.  Waiting to pass the annuity on to your heirs, though, can also backfire as they may get stuck with a large taxable gain on top of their other income.  (See more in Tax Troubles with Annuities)

If you have large taxable gains from the sale of a business, property, an annuity or something else, you’ll also want to consider the impact on your Medicare premiums.  A gain that pushes your taxable income above $214,000 (or $428,000 for joint filers) in 2017 can result in Medicare premiums that may be over $3,500 higher in 2019.

State income taxes can also be a factor.  For retirees that spend part of their year in states like Florida, Texas or Nevada that have no income tax, it may make sense to consider changing your state of residence.

For many retirees, income taxes are their largest expense.  Fortunately, there are ways to minimize the cost through a well-designed plan.  If your financial advisor, like most, often suggests that you “consult your tax advisor” it may be time to find one that can help.  Similarly, if your tax advisor isn’t looking at a multi-year retirement income strategy, you may want to hire an advisor that can offer more than simple tax preparation services.

At Vintage, our tax team works proactively with our clients to implement optimal strategies for reducing taxes.  We’re one of just a few firms in the area that offer the integrated expertise of investment management, financial planning and tax planning and preparation.  Learn more about our tax team and services.

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