How to Plan for Taxes in Retirement

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by Mike Gertsema

Mark Twain said, “The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.” Some of us might feel that way in the spring every year, especially those who haven’t planned carefully. Now that income tax season is behind us, it’s time to determine how the recent tax law change benefited us and strategize for the year ahead.

Every year the Adam Smith Institute calculates the number of days the average person will work to just pay their income taxes. This year May 30th is what they call “Tax Freedom Day” – when we’re “done” paying Uncle Sam for the year and the rest is ours to keep. I’m not sure how I feel about that, but I do know that we have to plan carefully to keep more of our hard-earned money.

Every year we ask our clients for a copy of their income tax returns to be sure we’re doing the best we can as wealth advisors and help them strategize for the next year. These returns also work as a “report card” on how we did our job in helping to protect client assets.

Tax Planning for Retirement

Tax planning for retirement is one of the most important parts of the personal financial journey. Remember, it’s not only about how much you have saved, but how you plan for income in retirement, and taxes are a critical component here.

On the Way There

In your wealth-building years, should you be maxing out your 401(k) or should you consider a Roth IRA or a cash reserve account in addition to your 401(k)? There are important, and starkly different, tax situations for each approach to retirement accounts.

If you’ve reached a goal in your 401(k) savings, maybe you should consider reducing your contribution to take care of other expenses that could be paid off before retirement. In our experience, most people retire IRA rich and cash poor with minimal money in savings.

When You’re Already There

People that are already retired might be able to take more out of their IRAs to build a cash reserve outside of these accounts. Financial advisors should collaborate with a client’s tax professional to develop an income tax strategy to help keep more of that hard-earned money.

With the income tax law change, some clients are able to take advantage of the higher standard deduction. This could be a big opportunity, but advisors have to be timely about it, as the tax law change isn’t permanent and many provisions are set to expire within the next ten years.

For the Long Haul

Life expectancy is markedly different now than it was even when our parents and grandparents retired. Your retirement could last thirty, even forty, years easily, and strategic thinking and planning are essential to supporting yourself.

Taking advantage of the different income tax brackets when taking monthly distributions from IRAs is an important strategy. You can make sure your non-qualified portfolio is tax efficient and avoid creating additional income that could push you into a higher income bracket.

Another consideration is the change to your income taxes when a spouse dies and you’re no longer filing joint, but single. Medical expenses, social security benefits, required minimum distributions are all important considerations along this stretch of the journey. Life changes and finances need to support these changes accordingly.

Let’s Talk Taxes

Most people will go through the year crossing their fingers hoping they won’t have to pay additional income taxes next year. Income taxes can seem complicated and confusing, but with the evolution of technology, we see a great opportunity to help our clients make the complex simple. We are able to illustrate in real time how a few tweaks in the cash flow could affect the short term and long term for taxes and savings.

At Gertsema Wealth Advisors, we say it’s not the way it used to be, it’s the way it should be. Let’s set up an appointment to talk you through your tax plan for retirement and make sure you’re protecting your livelihood well into tomorrow.

Call Us Today!

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