Is It Possible to Save on Taxes in Retirement?
$9,000 is a substantial amount. It’s also what you could potentially save on taxes in retirement.
Allow me to explain.
When it comes to retirement income, you will likely be able to choose where your income will come from and when to take it. Over time you have saved from your 401k, rolled an old 401k into an IRA, or started an IRA.
Perhaps, like many Disney employees, you’ve had the opportunity to purchase company stock at a discount. Through the years, the number of company stocks you own has accumulated. You may also have invested in some mutual funds on the advice of a friend. You weren’t quite sure what a mutual fund was. You knew you needed to save for retirement, so you put some money toward it.
You now find yourself with pots of money in several different places. While it can be an administrative nightmare, a topic for another day, this arrangement allows you to choose how and when to take income to cover your lifestyle expenses in retirement. A savvy financial advisor who understands your financial goals can help you choose the best way to take retirement income and potentially save you $9,000, $10,000, or much more on taxes in retirement.
Case Study Example
You and your spouse are in your early 60s, 60 and 61, to be exact. You’re both retired and need approximately $80,000 per year for living expenses. The first place you may decide to take the income from is your retirement account (IRA or 401k). You withdraw $80,000 from your IRA, for example. This can be broken up monthly, quarterly, or taken all at once.
Regardless of how you receive the payout, all $80,000 from the IRA will be taxable at ordinary income rates. Ordinary income rates are based on your tax bracket. If you’re married, filing jointly, you will look at what the tax bracket ends up for your income level. Tax brackets can change depending on the year, so it’s good to check each year as you plan to see where you fit in the range.
Take your income, and figure in any standard or other deductions you can take, to see approximately how much you will owe in taxes. For this example, let’s say you end up paying $9,000 that year. This is a little over 10% on $80,000 based on a specific year’s tax brackets.
You know you need $80,000 annually to pay your monthly expenses, take a few vacations, and visit the grandkids. Once you know what you need, your financial advisor will look at where your money is held to plan the best strategy.
Besides an IRA and 401k, you realize you have some company stock and have invested in mutual funds over time. These stocks and funds were purchased at different prices and with after-tax money. These types of accounts are known as non-qualified accounts. Meaning you don’t receive any tax.
No taxes? How can this be?
The government wants to incentivize investment by giving tax breaks for capital investment. This incentive allows you to sell your company stock or mutual funds, even if it’s a gain. Essentially, whenever you sell an investment that has a gain, it’s typically no longer considered ordinary income.
Suppose you’ve held that investment for more than one year. It’s now a long-term capital gain that brings a more advantageous tax bracket due to the government incentive. If you stay within the filing limit, which is upwards of $80,000 for married filing jointly couple, you could sell $80,000 worth of investments to create the cash because most likely, you won’t have 100% gains on it. You may have $30,000 or $50,000 in gains on your investment. This keeps it low enough that you can use the money to live off and pay $0 in taxes.
Would you prefer paying $9,000 in taxes or $0? The choice is clear what most would choose.
Other Considerations
A solid financial plan involves several other considerations such as:
- What is your overall financial situation
- How much income should you be taking
- When is the best time to take it
- How is your money invested
- What’s the current economy like
- Do you want to leave an inheritance for children or grandchildren
The answers to these will sometimes outweigh the initial tax savings. Choosing the right accounts and timing it well is a potentially great option to help you retire effectively.
Don’t Ignore the Details
As a financial advisor in Winter Garden, FL, I work with many people to help with retirement planning. Together, we look at the big picture while focusing on the details such as:
- Taxes
- Inflation Impacts
- Health Care Costs & Strategy
- Market Trends
Want to find possible tax savings or have other financial planning questions? I’m happy to help.
We can meet virtually or in person if you live in the Central Florida area. Please email me at kyle.newell@newellwm.com, call/text at 407.337.7128, or schedule a meeting at Schedule – Newell Wealth Management (newellwm.com)
Important Information
Newell Wealth Management, LLC (“NWM”) is a registered investment advisor offering advisory services in the State of FL and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by NWM in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.
All written content on this site is for information purposes only and is not intended to provide specific advice or recommendations for any individual. Opinions expressed herein are solely those of NWM, unless otherwise specifically cited. Kyle Newell and NWM are neither an attorney nor an accountant, and no portion of this website content should be interpreted as legal, accounting or tax advice. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investment involves risks including possible loss of principal and unless otherwise stated, are not guaranteed. Any economic forecasts set forth may not develop as predicted and are subject to change. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.