Tax Planning in Retirement is Just as Important as Investment Planning


Many people either approaching or already in retirement spend a lot of time coming up with an investment strategy as they should but don’t have a tax avoidance strategy. Prior to retirement we are in the “accumulation” phase, we are accumulating wealth to be used later. Once we retire, the paychecks stop and we begin the “decumulate” or draw-down phase of our lives.

Decumulating type investments in a tax-efficient manner is a part of retirement planning that is often overlooked.  That’s probably because a $xx,000 reduction in after-tax wealth over several years due to a poor tax strategy is much less visible than an $xx,000 decline in your investment portfolio.

Here are some suggestions to help

  1. Delaying Social Security benefits (SSB) until the age 70 is a huge investment and tax decision. The delay from age 66 to 70 is a non-taxable 32% gain, 100% safe from any market conditions.
  2. During this delayed benefits time you can take advantage of the new tax rates and doubling of the Standard Deductions. Plan to live off cash and withdraws from a taxable brokerage account. The idea is pay $0 in Federal taxes while taking advantage both the 0% tax rate on up to $77,200 in Capital Gains and Qualified Dividends. Bundle into this “tax loss harvesting” and more cash can be raised.
  3. Beyond this you can look to max out the benefits of being in a low 0%, 10% or 12% tax brackets by converting IRA funds into your ROTH IRA account. Just a broad statement, the very best scenario is to have 100% of all investments in a ROTH account! For example, during this SSB delay period every year convert enough IRA stock/funds into your ROTH to just hit the $77,400 threshold. That’s when every extra dollar is taxed at 22% instead of 12%. Make sure you factor this into your calculations in #3 above.
  4. Keep in mind that the above strategies work best if done BEFORE taking Social Security Benefits at 70 and the need to take Required Minimum Distributions (RMD) at age 70 ½. Up to 85% of SSB benefits can be taxed as ordinary income, all RMD is taxed as ordinary income also.
  5. Once you are getting Social Security and RMD you will already be in a “fixed” tax situation, the question will become what additional income do you need beyond SSB and RMD? This additional income will become the new tax strategy. It is not at all uncommon that your RMD (including SSB) is much more than you need to live on, this is a tax burden, hence the discussion above about conversions from IRA to ROTH’s.
  6. If you need additional income beyond your SSB and RMD look again to the maximizing of the Capital Gains and Qualified Dividends from your taxable account.

These are just a few suggestions and each family has unique situations. However, one this is pretty constant, tax planning runs hand in hand with investment planning. The ideal situation is that you are putting this overall master plan into place while you are in your late 50’s, probably the peak of your “accumulation” phase. However, you can make some of these decisions even while in retirement.



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