Can You Avoid Taxes in Retirement?
Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. Jeff has earned the Life and Health Insurance Licensure and has passed the Series 65 examination. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
CAN YOU AVOID TAXES IN RETIREMENT?
I doubt I am the first to share with you, but just in case you have not heard the news, or come to the realization yet, you have a silent partner in your retirement. This silent partner is the IRS. This is not for the purpose of discussing the utilization of tax dollars, policy etc., but more with the intention, of how do you minimize and/or eliminate taxes in retirement. To state the obvious, less taxes in retirement translates to more spendable income (ie. financial security), and that folks, is where I am driving.
For the majority of retiree’s, their situation often looks like having Social Security in the equation, and retirement assets to supplement their income. I have said it before, and will reiterate it now: how, when, and where you take your money from, has a very substantial impact on your situation as a whole.
MAGI - MODIFIED ADJUSTED GROSS INCOME
I will attempt to elaborate on a few topics based on a typical situation listed above. In doing so, keep in mind that your other income amounts and sources will dictate if your Social Security benefit will be taxed and realized as ordinary income, and to what degree. For those that file a joint return, with less than $32,000 MAGI, will not pay any tax on their Social Security. If the MAGI amount is between $32,000 and $44,000, 50% of Social Security is taxable, and should the MAGI exceed $44,000, then 85% of Social Security is taxable. This can be imperative to understand, as well as your situation as whole. Again, if there is opportunity to bring tax relief to the table pending where and how you access your funds, that is time well spent on the conversation.
In an effort to reduce one’s overall tax footprint, it would not be uncommon to simply follow the outline above as a way to reduce your taxes, but this does not work in every situation.
ROTH CONVERSIONS
I have discussed ROTH conversions previously, and they (ROTH/post tax savings) have their place here as well. This would be one of the many reasons it can be extremely valuable to have after tax savings. This can come into play if an individual/couple has a higher spending goal than what the Social Security limits bring to the table. Having post tax savings can be a great way to increase your spendable income without increasing your taxable income. These post tax savings could be the result of prior conversions, and/or long term, post-tax retirement savings that have been contributed to through one’s working years.
Beyond this, other types of assets (ie. Non-qualified – would be subject to capital gains tax, not income tax, and Life insurance, etc.) can also be very useful in keeping the spendable income at desired levels, while drastically reducing your taxable income.
WHAT TO DO MOVING FORWARD
Given that your situation is different than everyone else’s, this is far from a “one size fits all” kind of approach. If these are thoughts and questions you have been having, I would suggest reaching out to your financial advisor to discuss this in more detail.
Working with a financial professional to create these strategies can be vital in retirement. Although you cannot fully avoid taxes in retirement, there are steps you can take to reduce them.
Our advisors use a comprehensive approach to curate a personalized plan for each of our clients. We want to help you live the retirement you’ve dreamed of through our fiduciary-based financial planning. Call us today at (775)-853-9033 to see how Cornerstone could help you.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.