What impact will taxes in retirement have on your retirement income? Have you thought about a retirement tax strategy? Not necessarily my area of expertise, so this weekend I attended a local Taxes in Retirement 567 seminar (on Saturday morning!). It is hard to believe retirement is rated as one of life's most stressful events. That may be true for those that don't plan. On the other hand, you and I are planning, taking action now, and looking forward to a stress free retirement.
However, before we schedule our retirement party with drinks on the house and T-bones on the grill, we need a basic understanding of retirement taxes, the impact of taxes on our retirement income, and when to collect social security considering the tax ramifications.
How can we manage the payment of taxes effectively when we retire? Here's what I learned from the Taxes in Retirement 567 seminar.
Taxes in Retirement 567 Seminar Review
The goal is to have a comfortable and rewarding retirement lifestyle. To achieve this goal, we need to understand the impact of taxes on our retirement income. That's a given. First, I wondered what "567" meant in the title? Well, here's the answer:
Press Release: 567 Ways to Claim Social Security: Which is Best for Your Client?
Securian Financial Group/ST. PAUL, MN/Dec. 1, 2014: When Securian surveyed boomers and retirees about Social Security, only 18 percent had plans or were making plans for maximizing their benefits . . . There are 567 ways a married couple can claim Social Security! (SOURCE: press release found at BenefitsLink here).
Now that we cleared that up, let's move on to what I learned about retirement tax planning at the seminar.
Wow, what an eye opener! There is so much to consider. Actually, too much to take in during the 1 1/2 hour seminar. I scheduled a follow-up meeting with the presenting firm to ask specific questions about our retirement situation. They offer a free follow-up session and I'll let you know how that goes (subscribe to Boss Man Jax and you'll get the update, no SPAM, etc.).
The Effects of the 2017 Tax Cut and Jobs Act on Individual Taxpayers
The seminar included an overview of the effects of the 2017 Tax Cut and Jobs Act on individual taxpayers. The Act's provisions changed how tax deductions work and we need to consider how those changes can impact our retirement income streams. Also, we need to consider the year many "temporary provisions" expire. Why? The temporary, or Sunset Provisions kick in at different dates. What this means is the changes revert back to the 2017 tax rates, if Congress doesn't do anything before the applicable date(s).
Note that the Tax Cuts and Jobs Act (TCJA) includes several temporary provisions for individuals in the tax code. The Sunset Provisions can, and likely will, impact your taxes in retirement.
The changes to the tax law and the Sunset Provisions can be significant for our retirement tax planning. Boss Man Jax has a retirement planning financial model (customized Microsoft Excel Financial Planning spreadsheet), but it doesn't include how and when to tap into our retirement account(s) over time. The reinforcement of tax planning provided during the seminar was helpful; I want to add the impact of taxes to my retirement financial planning model or create a separate model for taxes in retirement.
One of the more complex aspects surrounding retirement can be determining which of your accounts to tap and in what order. Different types of accounts have different income tax consequences. (SOURCE: Closing in on Retirement? Read These Tips)
Tax-Efficient Strategies: Follow a basic withdrawal sequence. Pull assets from your accounts in the following order to maximize your income and minimize the tax impact as a result of withdrawal:
- Minimum required distributions (RMDs) from retirement accounts
- Taxable accounts
- Tax-deferred retirement accounts (e.g., traditional IRA, 401(k), 403(b), or 457)
- Tax-exempt retirement accounts (e.g., Roth IRA, Roth 401(k))
NOTE: Avoid withdrawing your way into a higher tax bracket. Consider pulling simultaneous withdrawals from a variety of taxed and tax-exempt accounts if you would like to be more adventurous with your strategy.
(SOURCE: Why You Should Pursue a Tax-Efficient Retirement Withdrawal Strategy)
Social Security Required Minimum Distribution (RMD)
Those already planning for retirement likely know about Social Security's Required Minimum Distribution (RMD). If you’re age 70½ or over and have a Traditional, Rollover, SEP, Individual/Solo 401(k) or SIMPLE IRA (not Roth IRAs), you’ll need to take Required Minimum Distributions (RMDs) annually.
There are several tools available to estimate your RMDs. Visit our Money Saving Resources page here and scroll down to the RMD calculator tools. Understand your RMD required by the IRS once you are 70 1/2 years old.
What are the tax ramifications in retirement associated with your RMD? Those planning a significant income during retirement can keep more money in retirement by evaluating the best withdrawal tax strategy. We definitely need a retirement tax strategy or the IRS can take a big bite out of our nest egg in retirement, unnecessarily.
We found the following taxes in retirement tips helpful:
- Roth IRA contributions and conversions: Do you expect your income to decrease significantly when you retire? If so, consider waiting until that time to put more of your money in a Roth IRA.
- State Taxes: another thing to consider is where you plan to live in retirement. Are you planning to move when you retire to a state that has no or a lower income tax rate then your current location? You pay state as well as federal tax on a Roth IRA contribution and/or conversion. If you expect your state tax rate will decrease in retirement, consider your total return if you delay the contribution/conversion until after you retire or move to a different state.
- There are income limitations for Roth IRA contributions, but there is no maximum age. Traditional IRAs prohibit contributions after age 70½; Roth IRAs allow contributions at any age.
- You are not required to take required minimum distributions (RMD) for Roth IRAs (assuming you are the original owner of the Roth IRA). The funds in the account grow tax-free. You can withdraw any of the funds in the account tax-free once you reach 59½ and have had at least one Roth IRA open for five years.
TAXES IN RETIREMENT 567 SEMINAR REVIEW | RATING
I attended a retirement seminar held on September 22, 2018, at the The Cultural Arts Center, Glen Allen, VA. My rating of the seminar? 5 Stars! We'll worth your time to attend.
Our presenter, Thomas P. Marshall, also gave the attendees a free copy of his book, Retirement Smarts, Plan Well, Retire Well (published 2010). I'll add a book review to Boss Man Jax's Book section once I finished reading it.
A financial educator, Thomas P. Marshall is President of Virginia Estate and Retirement Planning Advisors, Inc., an independent, fee-based financial planning and investment advisory firm with their main office located in Glen Allen, Virginia (#RVA | Richmond).
I have a follow-up meeting scheduled with Tom next week. I'll post what I learned about taxes in retirement after the meeting - Subscribe to Boss Man Jax and we'll send you a summary of our posts periodically so you can take advantage of the information to become financially independent and retire early (FIRE).
I recently came across a good article on the topic of Traditional verses Roth IRA contributions at:
Good read for sure and I encourage you to check it out. Here’s the comment I left on that blog/article:
Great read – glad to see smart people doing the math and sharing their knowledge to help educate others. Although I’m FI, I’m not retired yet by choice. An entrepreneur, I have worked for myself for a few decades and still enjoy it.
I recently attended a free financial seminar, Taxes in Retirement, sponsored by a local university. Excellent seminar and we briefly covered the IRA/Roth topic. Same advice, use the ladder approach later in life if you expect your income to go down significantly. However, it is also smart to open a Roth IRA account early to get the 5-yr. clock ticking. If you are truly on FIRE, maxing out $5,500 (more if you are older) in a Roth shouldn’t be hard to do, while still maxing out 401(k), etc.
As a business owner I have used a SEP IRA (works like a traditional IRA) in the past, but now use a Solo 401(k) since I’m saving six digits a year now and Solo allows me to contribute more to the retirement accounts. The Solo allows you to save significantly more tax free now (Traditional IRA) and/or pay taxes now (Roth). You have both options, Traditional & Roth, available with the Solo (at Vanguard anyway; check your options before opening an account with your financial institution).
Those of us (me for one) planning to retire early while enjoying a six digit income in retirement, need to plan/model withdrawal strategies in retirement before we retire. We’ll take some income from savings, some from the Roth and some from the Traditional to minimize taxes. Also, we need to consider Required Minimum Distributions (RMD) for Traditional IRAs, which include 401(k), SEP, etc. (after age 70.5). Roth IRAs don’t have RMDs and allow you to strategically make withdrawals based on your specific tax situation.
With a Solo 401(k), depending on your salary and age, you could contribute $55k per year or $61k for those 50 or older in 2018. My humble recommendation, start a business that generates income and open a Solo 401(k). Check out SCORE.org if you need free advice on business planning, etc. (FYI – I’m a SCORE volunteer helping others start businesses; great organization for small biz owners and entrepreneurs looking for free business advice).
I don’t think a plan to live on $18k/yr. is realistic with rising healthcare costs and inflation, but to each his/her own for sure.
Most individuals earning less than $220,000 and own a business producing income are able to contribute more to a Solo 401(k) versus a Traditional or SEP IRA. Larger contributions allow for more tax deductions; more tax deductions = lower tax bills and more retirement income down the road. A Solo 401(k) allows one to make contributions as both the employee and employer, which increases the total allowable contributions.
I too share what I’ve learned to help educate others on achieving FIRE. I have a post about the seminar, Taxes in Retirement, on my blog for those interested (BossManJax.com). Again, thanks for your post, which is excellent!
Here’s another good read on taxes in retirement that includes info for those that receive an IRA inheritance. RMDs can be required before YOUR retirement age!
Good read: Missed Required Minimum Distributions (RMDs)