What do retirees need to think of regarding taxes?
Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. Jeff has earned the Life and Health Insurance Licensure and has passed the Series 65 examination. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
WHAT DO RETIREES NEED TO THINK OF REGARDING TAXES?
Simply put, retirees should be thinking of how their income plan will either expand or contract their taxes. Where funds are drawn from, and when they are drawn, have a substantial impact on their overall tax footprint. As such, the execution of one’s income plan will either grow their tax footprint or shrink it. Aside from this, having some foresight is also recommended. Meaning, are you in a lower tax bracket now than what you expect in retirement, or vice versa? The result of this question should be heavily considered both leading up to and into retirement.
The basics of an income plan are what do you have, what do you need, and how do you make up the difference. The “have” income sources can generally fall into one of three categories:
TAXABLE
An example of a taxable income source may include a pension (albeit more of a rarity these days). While pensions bring a lot of peace of mind and consistency to the table, from a tax perspective, they can be challenging in some case as a result of their consistency. An exception here may include a disability military pension, which is generally received tax-free.
PARTIALLY TAXABLE
Social Security, which is almost always a component of one’s income plan will either be 85% taxable, 50% taxable, or not taxed at all. This is going to be determined by your other income amounts, sources and when you begin to receive it.
NON-TAXABLE
Nontaxable income is often the result of ROTH distributions. With this type of account, tax is paid on the “seed” and not the “crop”. Meaning, taxes are paid prior to the funds going into the account, they grow tax free, and are distributed tax free. This is an excellent asset to have included in the mix. Not only do ROTH’s bring value to the table in having access to tax free assets from a living benefit perspective, but also from a legacy perspective as well, given they are passed to beneficiary’s tax free.
SURVIVING SPOUSE
This also brings me to another point certainly worth discussing: tax environment for a surviving spouse. There is no denying the difference between the married filing joint brackets, and single tax brackets. This can have a monumental impact in many situations and is rarely discussed to the degree it should, if at all. Generally speaking, when a spouse passes away, the surviving spouse is left in an undesirable tax situation. Quite regularly as well, income sources may be lost or decreased (while income is lost, there is less of it to be taxed, yet this is most likely a double-edged sword). Herein lies the balance of ensuring sufficient income is present and secure for a surviving spouse, as well as a clear understanding of the tax implications.
WHAT TO DO FROM HERE
While I have shared some broad stroke points that should be considered, each situation is unique in its own right. As such, I encourage each of you to have the conversations with your advisors and accountants to develop and maintain your income and tax plan, without losing oversight on what the situation will look like for your surviving loved ones. Our advisors use a comprehensive approach to curate a personalized plan for each of our clients. Our planning includes an in-depth tax analysis to make the most out of their retirement. We want to help you live the retirement you’ve dreamed of through our fiduciary-based financial planning. Call us today at (775)-853-9033 if you’d like to see how Cornerstone could help you.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.