As Benjamin Franklin once said, “. . . in this world, nothing is certain except death and taxes.” For good reason, few people like to talk about either of these topics. Nonetheless, in this article, I will focus on the latter, taxes. In retirement, taxes are coming whether you like it or not. How you plan for those taxes will guide your decision-making during your retirement years.
At Financial Enhancement Group, we take care of people through all walks of their financial journey. Most people go through three phases of finance, and we call those phases accumulation, preservation, and distribution. Planning and targeting a few primary focal points during your financial journey, if done right, will allow you to control taxation in retirement.
In the accumulation phase, focus primarily on the following:
- Saving the correct percentage of your income; the younger you are, the smaller that percentage needs to be.
- Building tax diversification between three types of accounts:
- Tax-Deferred Accounts: IRA's, 401(k)s, 403(b)s
- Tax-Free Accounts: ROTH IRA's
- Taxable Account: Brokerage accounts and bank accounts
During the preservation stage, where the amount of assets that you currently have is more important than the amount that you are saving, focus on the following:
- Reducing your liabilities and your standard of living in preparation for the last phase of finance, distribution.
- Making sure your investments are in line with your risk profile.
The last phase of finance is distribution, and the two most important things to focus on during this phase of finance include the following:
- Managing market volatility through your distribution points.
- Managing the taxes that you pay on your distributions and income sources.
Inevitably, taxes are coming in retirement, and how you prepare for them will help you control how your dollars are taxed. If all your savings are in tax-deferred accounts, you cannot control taxation, because every future dollar you withdraw will be taxed. Therefore, it is essential to start building tax diversification inside your retirement vehicles, and here is why. Hypothetically, let's assume you and your spouse need $10,000 a month net (after taxes) to maintain your standard of living in retirement. After reviewing all income sources, you realize you will need to withdraw from your investments to accomplish your income needs. If proper tax diversification has previously been established, I recommend you withdraw from your tax-deferred assets up to the top of the 12% marginal tax bracket. Anything above that, you could take a distribution from a taxable account or Roth. This prevents those dollars from being subjected to the next marginal rate of 22% and reduces your overall tax liability.
Seeking the guidance of a fiduciary financial professional, like Financial Enhancement Group, will help ensure that you have done proper tax planning to control your tax liability in retirement. Happy Planning!
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
