David Roberts EA, and Director of Tax offers three helpful hints to help curb taxes during retirement:
Diversification of Assets
Diversifying your assets should ideally take place before you retire. Ever heard the term "diversify your portfolio?" This simply means to hold assets in different types of accounts that will receive variable amounts of taxation upon withdrawal. It’s a good idea to have your assets saved in all three big account types: Roth accounts, Traditional IRAs, and 401(k)s.
Get Savvy with RMDs
RMDs, or required minimum distributions, are types of withdrawals that are required for certain accounts when a person reaches age 70 1/2. And while they are required, all it takes a bit of savvy to ease their damage on your taxes.
- Set up automated RMDs so that you won't be liable for a penalty should you forget to take them.
- Don't let RMDs take you off of your portfolio plan if you are exceeding your target withdrawal rate. Reinvest them into a taxable account (like a Roth).
- Be strategic and pull the money from those accounts that you planned to rebalance at some point anyway.
Steer Clear of the "Tax Torpedo"
The "tax torpedo" hits your wallet when your Social Security becomes taxable as your income from various sources exceeds particular thresholds. To figure what is referred to as provisional income, simply look at your Social Security benefit, your portfolio income, and any tax-free income you have. That's your provisional income. If the amount hits above a certain threshold, your Social Security benefits become taxable.
- People with a provisional of around $50k don't have to worry because 85 percent of their income is taxable anyway.
- If you are below that amount, however, you may be able to manage your income, utilizing your portfolio, so you avoid hitting the threshold.
Please contact us for more information about how we can help.
David Roberts is the Director of Tax at Montini and Farrah Tax Advisory Group. He is an Enrolled Agent who works hand in hand with Marc Montini, Managing Partner, to develop tax-efficient income plans for our retirement clients.