Why Tax Planning is Important

Retirement is Not Tax Free

You may believe that once you stop earning a paycheck, you no longer have any tax liability.  Many retirees do not realize that the type of retirement accounts they have and when they choose to take distributions from them can significantly affect their tax bill.

Examples of a Retiree’s Taxable Income

Wages and Salaries – If you choose to work part-time in retirement, your earned income is taxable.  Taxes deducted from your payroll may not cover your entire tax bill if you have taxable income from other sources without adequate withholding.  Another item to note is that there are limits on the wages you may earn before your normal retirement age without impacting Social Security.

Pensions – Some retirees will have a pension benefit from their former employer.  Pension benefits are considered taxable income each year.

IRA Distributions – When you contribute to a tax-deferred account like an IRA or 401(k), you receive the benefit of excluding these contributions from your current taxable income.  In exchange, you will be taxed when you withdraw the funds during retirement.  Tax law dictates an age when you must take required minimum distributions from the account, whether you need the money or not.  As tax rates and laws change, this could cause a significant tax burden if not carefully monitored year to year.

Capital Gains – When you sell a security (stock, bond, mutual fund, etc.) for a price other than its original value, the money you make or lose on that sale is called a capital gain or loss.  If you plan to fund your living expenses from a non-retirement brokerage account, your tax bill will be affected by the type of gain or loss you incur when you place trades.

Dividends and Interest – Dividends from your investments or interest from your bank accounts also add to your taxable income.  However, keep in mind that there are some securities which could be tax-free at the federal or state level.

Other Tax Traps in Retirement

There are many other events that could impact your tax liability after you retire.

·    Many people do not take advantage of contributing to a Roth IRA during their working years.  They may benefit later by completing Roth conversions after a thorough evaluation of their tax situation each year.

·    Selling a business or investment real estate may trigger a large tax bill for a single tax year.

·    Inheriting an IRA from someone other than your spouse could unexpectedly put you in a higher tax bracket. 

Call Professional Financial Management Today

At Professional Financial Management, we specialize in integrating tax planning strategies with your retirement projections.  We can determine a savings goal, investment tactics, and distribution plan that is tax efficient.  Give us a call to learn more about how we can help you retire with confidence.