facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Tax Planning: The Third Key In Our RichLife Retirement Success Strategy™ Thumbnail

Tax Planning: The Third Key In Our RichLife Retirement Success Strategy™

It’s not just about what you make, but how much you keep.

Most retirement savings having an unpaid tax bill that becomes due upon distribution, meaning taxes are often the greatest single expense for most Americans today — even during retirement.

You need to create an efficient strategy that will help you pay as little in taxes as possible -- now and in the future.

Depending on your individual situation this may include:

Planning for required minimum distributions (RMDs): determining what these distributions will look like every year, which accounts they will come from and how they will impact your overall taxable income throughout retirement.

Roth conversion strategies: evaluating your current and future expected tax liabilities to help minimize the total tax impact on your retirement accounts.

It's IMPERATIVE that you plan your tax strategy BEFORE you retire -- ideally 10 - 15 years before you are ready to retire!

Let me share a quick story about one of my clients -- let's call him Dave -- who came to my office earlier this year --  just about 10 years too late!

Dave is a very active, healthy 72-year-old, he had a very successful career in real estate and has accumulated well over a million dollars in his IRA. 

Dave doesn’t need any of that money to live on. His pension, Social Security benefits and other assets provide a very comfortable income for him and his wife.

In a perfect world he would leave his IRA untouched — letting it grow until the day he passes it on to his kids.

Of course, Uncle Sam has something else to say about that.

Every year, Dave is forced to take a 6-figure required minimum distribution (RMD) even though he doesn't need or want it!

That’s a BIG problem… for several reasons.

First, the withdrawals eat away at the value of the account — reducing what he’ll be able to leave to his kids.

Dave is also required to pay taxes on that mandatory withdrawal — skyrocketing him into the highest bracket possible every single year.

And he’s worried about what a market downturn would do to the value of his account because it holds stocks and other investments.

If Dave doesn’t have enough cash in his IRA to cover his RMD, he needs to convert some of those investments to cash by selling them. 

Fortunately, he has been able to take that distribution at a gain for the past several years.

In other words, he’s sold his investments for more than he paid for them.

Dave's biggest concern is what will happen to that money when the market corrects.  He wants to avoid being forced taking this big annual distribution at a loss. 

Even though Dave is already retired, it’s still not too late to create a strategy to help reduce the amount of taxes he’s paying and preserve more of the inheritance he wants to give to his kids.

Dave wasn’t working with an advisor when he decided to claim his full retirement benefits at age 66.

So he didn’t realize how much better off he would have been if he had waited to claim his Social Security benefit at age 70.

That would have increased his benefit by at least 32% thanks to delayed claiming credits.

Of course, he would have needed an alternative source of income for those four years. If you’ll remember, though, he already had it.

Instead of relying on his Social Security checks, Dave could have been spending down some of his IRA to cover his income needs. Reducing his account’s value like this would have reduced  his RMDs — therefore lowering his taxes.

From there he would have been able to create a structured Roth conversion plan to move more money from his IRA into a tax-free Roth account.

Yes, that counts as a distribution. So he still has to pay taxes on that money when he converts it.

However, this move would have significantly reduced his RMDs and tax burden in retirement while maximizing his kids’ inheritance. 

So not having a tax plan in place as early as possible has cost him — and his kids — hundreds of thousands of dollars.

Luckily for Dave, he did get a reprieve this year from having to take his RMD this year because of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. 

I’m urging you today not to make the same mistake. Have a solid retirement tax strategy in place BEFORE you retire. 

Even though I was able to help Dave, I could have helped him a lot more if he had come to me 10 years before he was ready to retire. 

We would have created a much different tax plan for him... and set him up to leave a much larger legacy for his children.

Here are a couple of questions that you need to ask yourself...

Do you have a tax reduction strategy for your retirement distributions and legacy planning?

If not, when are you going to put one in place?

Make sure you have the retirement tax strategy conversation with your retirement planning professional to see if your situation puts you at risk of facing some of the same challenges as Dave.