Don’t Let Your Retirement Plan Become a Tax Time Bomb
My vegetable garden always looks incredible in late May following the spring rains. The beds are orderly and full, plants flourishing, early harvest active, and weed containment stellar; but nature is persistent, and as the daily workload increases in mid-summer’s soggy heat, the war on weeds invariably morphs into a furious battle to save the harvest! Just as the gardener benefits not from that which is grown but from that which is harvested, a retiree profits not from wealth that is accumulated but from wealth that is retained after Uncle Sam takes his share.
The first step in effective retirement planning is to realize that tax planning is an indispensable factor, and the goal is not necessarily to minimize taxes each year, a primitive strategy which can end terribly during one’s retirement, but to creatively minimize the total taxes paid over one’s lifetime. The second step is to work with a CPA who embraces this concept, which likely contradicts their early education, and who owns the responsibility not merely to prepare your annual return, but to work with your advisor to achieve this end. To these you also want to consider adding the following tax strategies:
Maintain a cost basis for each asset on your Net Worth Statement and a total cost basis for your estate. This will drill the aforementioned truths into your thinking and inspire you to become an effective tax planner.
Maintain emergency savings equal to nine months of household spending. This will prevent you from paying taxes and penalties on retirement plan distributions to cover unplanned expenses.
Utilize advanced planning software to compare the ultimate tax benefit of Roth vs. Traditional vs. after tax accounts to your personal plan. Appropriate contributions based on your findings.
Fund a non-retirement brokerage account (NR-Brokerage Article) and benefit from annual tax harvesting and other versatile tax features.
Use low income/low tax bracket years to increase the cost basis on appreciated assets and offset high income/high tax bracket years by skewing retirement contributions towards traditional accounts.
Investigate Strategic Annual Roth Conversions (SARC), particularly between post-full employment and commencement of Required Minimum Distributions (RMD’s, age 73) to lock the tax in at a lower rate and reduce future RMD’s exposed to potential tax hikes.
If over age 70½, consider Qualified Charitable Distributions (QCD), especially if you are receiving unneeded RMD’s and/or already give regularly to a 501(C)(3) organization, but KNOW QCD RULES.
Make sure your retirement and estate plans are tax savvy and highly complementary organisms.
Each year I try to add a new weed-fighting technique to the containment strategy to increase the ultimate yield. I believe it will benefit your family immensely to do the same as you plan your financial future with the aid of an intelligent tax plan.
Think about it, Shaun.
“In an abundance of counselors there is safety” ~Proverbs 11:14
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.
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