You’ve beaten the odds and managed to save a substantial amount of cash. Congratulations! But now you need to know how to keep taxes from eating it up.” Andrew Winnett


By Andrew Winnett

If you’re like most people, you have focused a great deal of time and effort on putting as much as possible in your retirement accounts. You may even feel a bit “rich” as you watch your accounts balloon in value. What many people don’t realize, however, is that if you don’t spend those dollars in a tax-efficient manner, you could unnecessarily deplete large chunks of those savings. Failing to make a tax plan for retirement is a mistake that no one can afford to make, especially as tax laws on both the state and federal levels continue to change.

If you’re expecting some tax breaks or senior discounts on what you owe, I think you’ll be disappointed. That’s why tax planning is especially critical, particularly if you hold a substantial amount of your assets in qualified plans such as traditional IRAs or 401Ks. You’ll eventually need to pay taxes on those deferred accounts. Unfortunately, the tax impact can be devastating. For example, suppose you had a non-tax-sheltered brokerage account with a $750,000 balance, and you had another $750,000 in your employer’s traditional (non-Roth) IRA. When you take money from that traditional IRA, you will pay what’s known as “ordinary” income tax on it. Assuming a mid-range 24% tax rate, the actual value of your IRA is only about $570,000. The remaining $180,000 is your deferred tax liability. So, the unpleasant truth is that you don’t have a $1.5 million retirement portfolio at all. It’s also possible your brokerage account will incur capital gains taxes, too. Take a look at our topsy-turvy financial system, with politicians spending money like drunken sailors on shore leave. Do you believe that taxes will go up or down in the future? My bet is on UP.

With this in mind, you must plan your spend-down thoughtfully and strategically while you still have time. Don’t just stash money away in your plans and forget it until later. Otherwise, a time will come in your 70s when you will have to deal with Required Minimum Distributions (RMDs). If your account balances grow too large, you could be looking at some unpleasant RMDs that have the potential to make a portion of your Social Security benefits taxable. You don’t want to deal with that situation once you’ve retired. However, if you are in your late 50s or 60s, you have the chance to sit with a qualified income planner or tax specialist and devise ways to limit the tax impact.

Andrew’s Analysis: When planning for a time when you no longer work, it’s wise to consider how taxes can and do affect your retirement income. Taxes are unavoidable, and you will eventually have to pay. Sooner or later, the Tax Man cometh, like it or not.

Everyone’s financial situation is unique, there is no perfect method to protect your wealth from erosion by federal and state taxes. However, you can and should take a closer look at your unique situation to see where you might be able to avoid paying more than is necessary. The good news is that your tax and retirement income specialist can help you incorporate various tax-mitigation strategies, including timing withdrawals, tax-loss harvesting, and perhaps conversion to Roth IRAs.