November 01, 2019

When you are working your income is your paycheck but after you retire things can be much more complicated.  When you are working the taxes you pay are pretty straight forward. You make this much you pay that much. When you retire income can come from many sources so tax planning becomes very important. If you can minimize income and therefore taxes over the period you are retired you will be able to have a more comfortable retirement.  The key is to start planning years before you actually retire because managing different income sources to be tax efficient can get complicated. Here are a few of the income sources you may have and techniques to control taxes you may want to consider.

Social Security  When you take Social Security you want to maximize the amount you receive. That doesn’t always mean taking it at age 62 or waiting until age 70. Because many people are married when they retire there are two decisions to be made. Most people just guess but there are ways to analytically determine what is best for your situation.

Your Social Security may be taxed. Depending on your income and when you retire up to 85% of your Social Security may be taxed so if you don’t need the income it may be wise to delay filing until age 70. If you are under your full retirement age there may be additional tax on Social Security if you file and still work.

Distributions From an IRA  The distributions you take from traditional IRA’s and qualified retirement plans is taxed at ordinary income tax rates unless you made some after tax contributions. You need to watch the amount you take because just a dollar over the limit triggers taxes on your Social Security.

Required Minimum Distributions (RMD) Once you reach age 70 ½ you must begin taking distributions from any traditional IRA’s or 401(k)’s you have. You do not have to take RMD’s from ROTH IRA’s and if you are still working you don’t have to take RMD’s from your current employer’s 401(k). These RMD’s could bump up your income if the RMD is more than you plan to take from your qualified plans.

ROTH IRA Conversion Many people with large IRA’s may have to take RMD’s they don’t really need when they reach age 70 ½. If this is the case you may be able to do some planning before hand and convert some of your traditional IRA into a non-taxable ROTH IRA. The down side is that you have to pay ordinary income taxes on any amount you convert. So don’t get scared and shoot yourself in the foot by converting too much and paying a ton of taxes now. Anyone with a really large IRA can only reasonably convert a relatively small percentage of it in any one year.  

Capital Gains Don’t forget that capital gains count as income even though it is taxed differently. If you invest in mutual funds in taxable accounts they may pay varying amounts of capital gains every year. Tax efficient mutual funds or ETF’s can be used to control capital gains and eliminate some nasty tax surprises.

Qualified Charitable Deduction  Using your IRA to give to your church or favorite charity can reduce your income. If you are at least age 70 ½ and have to take RMD’s you can donate directly to a qualified charity from your IRA. The amount you give will count toward the RMD you must take but will not be counted as income when you file your tax return.