If you are retired or preparing for retirement, here's one big question to ask: Is your retirement plan tax efficient?
Imagine a reality where the correct income from the correct source at the correct time coordinated with your investment strategy could reduce your tax burden over the course of your retirement. Understanding some basic things about retirement income are essential.
One: Not all income is created equal, in other words, some types and sources of income are subject to higher tax rates than others. How you utilize this information is up to you.
Two: Planning for taxes involves much more than just filing for last year, it involves a multi year strategy to reduce the tax burden of future income ( like RMD's from your IRA ) and be strategic about your tax planning. It's a long-term approach.
Three: What is the potential that you could be in a higher tax bracket in retirement than when you were working?
For example, if you are 63, and your IRA is a mllion dollars today. You have retired but you have a nice pension, and you are already drawing social security, so you are not touching that IRA, because you have to pay tax on the amount you withdraw when you do. Now take a moment. Flash forward ten years. You just turned 73, and now your IRA has doubled to two million dollars, at which time you have to take a required distribution from it. Do you know how much that's going to complicate your tax life? Also consider the possibility that tax rates have increased over that ten years.
What this presents is an opportunity to potentially reposition some of that Future Tax Problem that traditional IRA represents by converting small amounts of it each year over the next ten years into a Roth IRA. Creating two things: tax free retirement income, which is very attractive, and more tax free inheritance for those that you might leave behind.
Given the potential that in two years, tax rates could increase, when the Tax Cuts and Jobs Acts reductions expire for tax year 2026, I encourage you to have the conversation or at least explore if this is something that could help you down the road. It may not be the right strategy for everyone, and timing can be critical. If you are already withdrawing five percent from your Traditional IRA every year, you may not have an issue. But if you have been avoiding the tax on that little "tax time bomb", and putting off dealing with it, time is not on your side.
Get in touch with us now, let's have the discussion. or just click on our scheduler, to begin taking control of your tax future. Let's develop that plan together.
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