Tax Planning in the Retirement ‘Gap’ Years
The day has finally come to fully retire and move on to the next phase in life. You’ve saved diligently for the last 30 years, and it’s time to start using the money that you’ve work so hard for. As you look to the future and everything this exciting season of life offers, you start to contemplate the retirement paycheck that has the sustainability to last your lifetime while providing and protecting. As far as resources, you know you are ok. But, when you begin to look at your portfolio, you realize that over the years, you’ve accumulated pre-tax accounts, Roth accounts, a joint account, 401(k)s, and the list goes on. And then there’s the one guarantee in life that you must still plan for, taxes. Income taxes may be one of the most significant expenses in retirement, making the planning even more critical.
How do you efficiently withdraw a paycheck from your portfolio with various accounts and the tax treatment associated with them? While the question might seem simplistic on the surface, there are many moving parts to consider, such as current and future tax brackets, income sources, capital gains, and more.
Complex goals require trusted relationships and fully integrated solutions. Having a team that knows you personally with expertise in retirement planning, taxes, social security optimization, risk management, and legal to navigate this transition is critical to achieving your personal goals. Let’s look at a case study and the importance of post-retirement planning.
Both John & Jane Sample, 65, have amassed a $2,000,000 portfolio over their working careers and are now ready to enjoy their retirement. Their income needs are $125,000/annually, of which
$25,000 will come from Social Security and another $25,000 in pension income. Their portfolio consists of $1,650,000 in pre-tax dollars, $300,000 in a joint account and $50,000 in Roth accounts. The Sample assumes that they should let their pre-tax accounts grow tax-deferred while using their other assets until they take their Required Minimum Distributions (RMDs) at age 72.
John & Jane can keep their taxes relatively low while taking withdrawals from their joint account for the first few years. In fact, with their standard deduction of ~28,000 for 2021, John and Jane find themselves with very little taxable income. That’s a good thing. While nobody wants to pay more in taxes, this may not be the most optimal strategy.
Let’s look at another scenario, but this time with a bit of planning work involved. Assuming the exact figures, the Sample’s now include some tax planning into their retirement withdrawals which may go against their initial assumptions. Before retiring, John & Jane were in the 22% marginal tax bracket (based on today’s rates). With their SSA and pension income and the IRA account that makes up over 80% of their total portfolio, they are expected to be at least in the same tax bracket in the future (if not higher, should rate increase). So instead of taking all their withdrawals from their joint account, they now start to implement IRA withdrawals to “max out” their 22% marginal tax bracket. Doing this during the gap years, retirement age until age 72 when RMDs are mandatory, helps reduce future RMDs, hedge against higher tax rates in the future, utilize Roth conversion strategies, and improve the overall tax diversification of their portfolio.
A lot can change in retirement, especially your tax picture. Not sure where to start or what strategies, such as a Roth conversion, make sense for your specific situation? We’re here to help. At Executive Wealth Management, we have the team and resources to integrate your retirement income and proactive tax planning through EWM Tax Solutions. Not only can we evaluate what opportunities are available on a year-by-year basis, but we also prepare your return to ensure a well-coordinated approach to your finances.
To learn more about our retirement planning services and EWM Tax Solutions, please see our website at ewmadvisors.com/services or contact us today at 810-229-6446 to schedule a no-cost, no-obligation initial meeting.
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Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any specific level of qualification or skill. Investment Advisor Representatives of EWM offer Investment Advice and Financial Planning Services to customers located within the United States. EWM does not offer tax or legal advice.
Executive Wealth Management and EWM Tax Solutions are separate but affiliated companies. Executive Wealth Management and EWM Legal Services are separate but affiliated companies.