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Tax-Ready Retirement

A happy senior couple calculating their finances in a beautiful home.

Almost everyone wants to manage their annual tax bill. And there’s nothing wrong with taking a proactive approach to taxes. In fact, we encourage it!

While managing taxes can be healthy, obsessing about taxes can be counterproductive.

It can lead to tax-focused decisions, which may be shortsighted. When working with retirement-minded clients, we help them explore tax-advantage portfolio opportunities. But at the same time, we keep them focused on using their assets to build a complete retirement strategy.

“The thief comes only to steal and kill and destroy; I have come that they may have life, and have it to the full.” John 10:10

Most people retire with three types of assets:

  • Social Security or a pension plan
  • Taxable, non-retirement assets
  • Retirement-specific investments with tax advantages

Creating a strategy about when–and how–to draw on these assets can affect how much you owe in taxes each year.

Below we share a four-step approach designed to help you start to get your digital estate organized. “In today’s society, far too many people don’t want to accept responsibility for their financial well-being,” wrote Mick Owens in his popular book, Diamond of Life: The Five P’s of Success and Significance. “Many consider themselves to be victims of their circumstances.”

  1. Social Security benefits. Most people know they can start drawing benefits as early as age 62 or defer their payments up to
    age 70. What fewer people know is that at least 15 percent of your Social Security income is exempt from federal income taxes. Since Social Security is subject to favorable tax treatment, it’s one factor
    to consider when deciding when to draw benefits.1,2
  2. Where’s your money? Having a complete sense of your assets’ locations is helpful as you enter retirement. If your assets are in traditional tax-deferred accounts and you retire at a lower tax bracket, this approach may work to your advantage. But if you end up in the same bracket or a higher bracket, you may just have delayed
    or even increased your tax bill. Having assets invested in accounts where different tax rules apply may give you more flexibility when creating an income strategy.
  3. A withdrawal strategy that includes RMDs. Required minimum distributions (RMDs) apply to certain tax-advantaged accounts starting when you reach age 73. If you have a high balance in one of these accounts, your RMD should be considered when building an income strategy.

 

Some people might consider paying the RMD directly to their church or charity of choice. “That way, the RMD won’t be reported on your personal tax return,” said Mick Owens, who wrote the popular book, Diamond of Life, The Five P’s of Success and Significance. “Due to the increase in the standard deduction, many people no longer get the benefit of a charitable contribution. We can help.”

Mick pointed out that we’re not tax experts, but we are associated with companies that are. The general ideas we’re discussing are for informational purposes only. We encourage you to consult your tax professional for advice on your specific situation. Alternatively, our planning department can
do a tax analysis!

  1. TRowePrice.com, February 9, 2024
  2. Investor.Vanguard.com, January 20, 2022

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