Many individuals have worked for years to control their budget in order to save and create a solid financial plan for the future. As we think about our savings and planning for retirement, amid the visions of leisurely days and a free schedule, many underestimate the reality of taxes in retirement. To make the most out of your savings and retirement accounts, tax planning should begin during your initial financial planning.
Jennifer Wertheim, director of tax planning at CAPTRUST, stated, “The tax implications that accompany retirement decisions can significantly impact a person’s overall financial landscape. That’s why tax planning is such an important part of financial planning overall. It’s a way to safeguard your hard-earned assets and stretch your savings.”
“Retirement tax planning relies on four pillars,” says Elisabeth Jacobson, a CAPTRUST financial advisor. “Know how your assets will be taxed. Develop a strategy for how you’ll withdraw money. Avoid things that are going to put you in a higher tax bracket. And review your tax situation whenever life changes.” Jacobson says she has seen many cases where new clients could have benefited from earlier planning for retirement taxes. “There are so many people who are good at saving and investing but aren’t aware of how their accumulated assets will be taxed when they are sold or withdrawn,” she says.
For instance, Jacobson says she once met with a couple who had already started taking required minimum distributions (RMDs) from their retirement accounts. RMDs are minimum amounts that must be withdrawn annually from individual retirement accounts (IRAs) and qualified retirement plans, like 401(k) or 403(b) accounts. Your birth year determines when you must start taking RMDs. Generally, they are required once you reach your early 70s. “These clients had done a great job saving money, but they’d put all their savings into a taxable IRA,” says Jacobson. “That meant every single dollar they had was going to be taxed. And their RMDs were huge, so every time they withdrew money, they were raising their marginal tax bracket— and their tax bill—even further.” Incorporating projected taxes into your financial plan can help avoid mistakes like this.
Balance What Is Taxable
Jacobson says, “It’s important to know all your possible sources of retirement income and how each one will be taxed.” To start, make a list of all your assets and label which are taxable and which are not. If you aren’t sure, it’s a great opportunity to meet with a CAPTRUST Financial Consultant to review your assets and your retirement plan to develop a strategy to make sure you have access to the funds you need while also minimizing your tax liabilities.
Some assets such as your Roth accounts will be tax-free but others like your TSERS or ORP account will be fully taxable. According to Philip D’Unger, a manager on CAPTRUST’s wealth planning team, “ideally you will have some balance of taxable and non-taxable assets from which you draw your retirement income.” A financial consultant will be able to assist in ensure that you have diverse assets and assist with any rebalancing as needed.
Make a Withdrawal Plan
Jacobson says people tend to spend more money in the first few years of retirement than they spend later. “Those early years can be a sweet spot for tax planning. It’s a good idea to sit down in those first few years and figure out the big pieces of your new financial plan.” For instance, Jacobson says she helps clients understand when to start taking Social Security benefits, when to sign up for Medicare, and when they’ll be required to take RMDs.
As CAPTRUST has shown, it’s important to continually plan for taxes both during your working years while saving and in how you withdrawal your funds once you begin retirement. The process of knowing how much to save, in which type of accounts, and how long those assets will need to last came be overwhelming. To set up one- on-one appointment with CAPTRUST to discuss your personal retirement plans and to create a Retirement Blueprint, click here.
For more details, a sample list of taxable and non-taxable income and the full article from CAPTRUST on being tax-smart, click here.