Most people have given thought to how they will use their savings and investments to live their retirement years but haven’t thought about how retirement income is affected by taxes. Any solid retirement income plan should consider tax issues. 

Lowering Taxes in Retirement

Social Security is taxable for most Americans. Many of those who receive Social Security benefits pay income tax on up to half or even 85% of benefit because their complete income from Social Security and other sources pushes them above the tax threshold. If you have properly planned for retirement, then you will have several sources for drawing retirement money. So how do you plan for lowering your tax bill later in life?

Tax-Advantaged Retirement Accounts

Often, future tax planning begins in the savings phase of retirement. There are many types of retirement accounts that offer tax benefits. Money invested in 401(k) and IRA accounts is pre-tax, which means you won’t pay taxes until the funds are withdrawn upon retirement. These decrease your taxable income now and defer those taxes until retirement. ROTH IRA money is invested with no pre-tax savings and money withdrawn at retirement age is tax free. Brokerage accounts also offer tax advantages because the capital gains taxes are structured to reward long-held investments. Planning when you’ll withdraw these funds and how you’ll use that money in retirement has tax implications.

Diversified Income Streams

Chances are you will diversify your retirement money so your yearly income is drawn from multiple sources. Annuities, dividend stocks, exchange-traded funds, municipal bonds, certificates of deposit and annuities can be sources of income which are subject to different tax rules. To read more about diversified income streams in retirement, check out our blog on the subject. Arranging sources of retirement funds can impact the amount and time frame of taxes paid.

Delaying Social Security

Taking social security benefits later (67 or 70) will not only increase the size of monthly checks, but also could decrease the taxable amount. Since the tax rate on Social Security depends on total income, drawing from Social Security when you aren’t paying taxes on withdrawals from tax advantaged accounts can keep you in a more beneficial tax bracket in retirement.

Tax-Planning Saves Money 

Tax planning can help you reduce retirement taxes and increase your after-tax retirement income. There are two types:

Long range tax-planning is general guidance regarding how much to withdraw from which accounts from year to year, and how to coordinate your sources of income with your Social Security benefits to maximize after-tax income.

Annual tax-planning assesses how tax rates and deductions change yearly. Annual tax planning uncovers the tax-planning opportunities long-range plans are unable to predict.

Both types of tax planning project tax brackets, income sources and provide a roadmap to rearrange investments to reduce retirement tax burdens while maximizing income needed to live the retirement you desire. It’s important to consult with a tax professional on these matters. Blue Waters Financial Group always refers our clients to trusted partners when needed.

About Fixed Annuities

Fixed annuities allow investments to grow tax deferred. This means that all dividends and interest may be fully reinvested while they remain in the annuity until they are withdrawn. Investments are allowed to grow without being reduced by tax payments. Annuities not a way to avoid taxes completely. Taxes are not due until you receive income payments from the annuity. Withdrawals and lump sum distributions from fixed annuities are taxed as ordinary income.

How taxes are determined depends on how the annuity was funded. Annuities are typically funded with tax-advantaged retirement accounts. 401(k) and traditional IRA funded annuities are considered qualified annuities and are fully taxed, while those funded with ROTH IRAs are generally tax-free (except for interest earnings) and seen as non-qualified accounts if certain requirements are met.

Blue Waters Financial Group is your resource for expert advice on retirement income planning, insurance products and annuities. Let’s discuss your financial future and the possible role of these products in your financial strategy. To schedule your no-obligation meeting, just click on our contact page or call us today at 704-790-2583 (BLUE).