Timing is Everything in Retirement Tax Planning

Jan 1, 2016
Author: Scott Hanson


Ouch! Poor Tax Planning Hurts 

Let me say right up front that I am not a tax accountant. However, after 25 years as an advisor, and with more than 4,000 clients, I’ve been witness to some truly terrible (and avoidable) tax outcomes involving otherwise savvy and conscientious investors.

With that in mind, not a week goes by that someone in our firm doesn’t meet with a newly-retired person or couple who, much to their dismay, discovers that they’ve been badly overpaying their taxes. I’m not referring to the type of overpayments that come back to you in the form of an IRS refund. I’m talking about needlessly or accidentally overpaying the government tens of thousands of dollars that they’ll never see again.

The problem is that tax laws in retirement are frustratingly complex. Navigating the rules and regulations is no simple task, and the wrong decisions or advice can be the difference between a manageable tax bill and a staggering IOU to Uncle Sam.

Strategize Taxes Like You Strategize Investments

If you’re looking to retire in the next few years, you’ve likely spent a fair amount of your working life thinking about your investments and how they can best serve you in the future.

But if you’re like most folks who are on the verge of retirement, then you probably haven’t given nearly the same amount of attention or energy to your tax strategy as you have to your investment portfolio. Yet between a smart investment strategy and a smart tax strategy, the latter can actually be worth more to you in the long run. Simply, without a plan in place, needless tax errors or oversights could reduce your retirement savings by 10 or even 20 percent.

Timing Your Investment Distributions the Right Way

For most of us, retirement income is a whole new ball game compared to pre-retirement income; a time when we could count on a steady, predictable flow of money in exchange for our labor. But once we are transitioning into our post-career lives, we’ve got to look at how our investments will earn us income that we can live on during our retirement years.

When it comes to drawing down investments during retirement, timing is everything. When we take distributions impacts our income tax bracket and, by extension, how much we pay. Knowing the laws for the state in which you live, knowing which account distributions are taxable and which aren’t, knowing what amounts should be distributed (and at what age), and knowing why some tax deductions are superior to others can save you thousands.

Simply, if you don’t know these answers, you’re risking your future.

Have an Advisor Walk You Through Your 7 Personal Decision Points

What Out for Social Security Taxes

Social Security. It’s something you’ve likely paid into your entire working career, and the benefits come tax-free, so what’s the concern? In less than 14 years from now, by the year 2030, the Social Security Administration estimates that more than 58 percent of retirees will be paying taxes on their benefits. (In 1984, less than 10 percent of all recipients paid taxes on their Social Security income).

Think that sounds grim? It gets more complicated. Let’s say you decide to work part time after you retire—this can adversely affect your benefits as well as your tax liabilities. Or, for example, let’s say you might decide to convert part of your IRA into a Roth IRA and calculate the exact amount that will keep you in a 15 percent federal income bracket versus getting bumped into the higher 25 percent bracket. If you’re not correctly calculating Social Security benefits into the mix, you could inadvertently bump yourself into a higher tax bracket without realizing it.


Best Place for Tax Dollars? In Your Pocket. 

The amount, the kinds, and the blend of your income sources all impact your tax burden. Investments are taxed at unique rates, as are dividends, and the level of both rates depend upon when and how much you draw at any given time. There are ways to transfer pre-tax plans to post-tax plans, but you must time these transactions correctly. If you’re not up on the national and state laws, you can get hit with a shockingly large tax bill.

And if you've mistimed your transactions, and that bill arrives, there's usually nothing you can do about it.

Don’t let that happen to you. Keep your money where it belongs: In your pocket. Speak to both your financial advisor and a certified tax professional now, before you begin the retirement transition process.

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