Tax planning is essential for retiree survival.

By Jerry Yu

As I explain in my new book, “Fortify Your Financial Kingdom,” taxation doesn’t magically disappear just because you’ve stopped punching a time clock. Far from being a past problem, taxes may be one of your most significant retirement expenses. If you plan on retiring but haven’t factored in taxes, you may end up with much less cash than you expected; money meant to last the rest of your life.

Many pre-retirees accept a logical fallacy as they ready themselves to leave the workplace. That fallacy is that, as you grow older, you’ll earn less and have fewer expenses. You will move to a “decreasing responsibility” phase with less debt and more disposable income.

As I have written before, when you have less money than you planned, your retirement moves from being calm and blissful to chaotic and stressful in an instant. But, if the decreasing responsibility theory is true, many people reason, then surely taxes will go down. My response to that idea is, “Probably not.”

You see, while it’s true that you may not have any earned income (i.e., a paycheck) when you stop working, you could have a lot of passive income coming from assets such as investments, qualified plans, savings accounts, or pensions. That passive income may create a massive tax bill if you haven’t thought ahead.

Unfortunately, many retirees learn that just because you retire doesn’t mean Uncle Sam rides off into the sunset, leaving you to enjoy the fruits of your years of penny-pinching. You will have to pay tax on all your income, even when earned outside work or used just for your retirement needs. So, it isn’t a matter of IF you’ll pay taxes when you retire, but exactly when you should pay them.

When is the best time for you to pay taxes- now or later? Do you expect tax rates to go up or down? The answer I tell my clients and prospective clients is that it depends a lot on what you want and need your money to do.

Will you keep more of the fruits of your labor?


I use an apple tree analogy to illustrate this concept. Imagine that your paycheck is an apple tree planted in your backyard years ago. A productive and healthy specimen, your apple tree has matured, producing a bushel of delicious fruit every year. The problem is you don’t own the land. So the person who owns your mortgage, let’s call him Uncle Sam, expects you to pay him in apples.

As landlords go, Uncle Sam is fair, offering you multiple options for paying him his cut of your apple crop. One thing you can do is let Uncle Sam stop by at harvest time every year and collect 30% of your apples. The rest is left to you to do with as you please. However, if you purchase more trees, or if your current tree produces more fruit next year, he gets to return and get 30% of those harvests.

That’s what happens if you exercise your “tax now” option. This selection is the most common option used by those who have apple trees growing on Uncle Sam’s land. But Uncle Sam realizes this tax payment option isn’t suitable for everyone. So, he provides another choice, allowing you to increase your apple crop by going from having one tree to creating an orchard.


Instead of taking 30% of your production each year, Uncle Sam will let you keep everything you grow for several years. You’ll now be able to take some of the fruit you’d have to give him every year and use it to increase the harvest. Sounds great, doesn’t it? But, before he leaves, Uncle Sam warns you that when X number of years are up, he will be back around to collect his “fair share.” That might be the same 30%, or it could have increased to 40%, 50%, or more.

That’s your pay-later tax option.

Still, Uncle Sam likes to be as fair as possible. He knows you might feel that option two is more than you want to pay. So, he’s got one last opportunity for you. He will still take 30 percent of your apples up front, but if you then plant seeds to grow an orchard, he promises not to take any of the increased harvest. This is the “tax-advantaged” way to pay.


Let’s move away from the fruit orchard analogy and apply this thinking to your retirement savings. Your ideal way to pay taxes depends on what you need your savings to do, and that’s different for every person. Everyone needs their money to do different things at different times. What if there were a way to leverage the advantages of all three tax payment choices?

After all, you’ll need to use at least some of your money for basic living expenses. You also want to put a portion aside to achieve growth over time in your qualified plans or other retirement vehicles. This is cash you save and allow to grow as much as possible before Uncle Sam finally taxes it. In this situation, not only does the government defer taxes, but it also provides a credit to reduce your income tax bill. For example, if you contribute $6,000 to your IRA, you can deduct that amount at tax time. The biggest downside is that your liability will be based on the prevailing rate when you finally pay taxes on that money. Since taxes are almost certainly going up, not down, you could find yourself with a heftier bill than you imagined.


Unless you can predict the future with a high degree of accuracy, you probably do not want to trust the government with every penny of your savings. I don’t mean you should not max out your 401k, especially if your employer gives you a matching contribution, but you may want to combine this selection with the third option presented.


In future articles, I will explain which products and methods I use to achieve this comprehensive tax planning strategy. For now, you need only know that you have some choices when it’s time to pay the tax bill. You will also need clarity about your money and what you require from every dollar you save or invest.


Yu’s Views: As you start spending your wealth, getting your final paycheck can be an occasion for both delight and fear. The last thing you need right after transitioning to retired life is a giant tax bill from the IRS.

That’s why tax planning is so crucial for those about to retire.  Talk to your wealth advisor or tax specialist today about adding comprehensive tax planning to your retirement “TO DO” list.

To get a free copy of my book

Jerry Yu Reign Financial

phone: (626) 890-0090

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