Taxes in Retirement

By Dean Barber

June 6, 2019

It’s the things that you think you know about, that just isn’t so that gets you in trouble, and taxes in retirement is one of those things. Many people believe they’re going to be in a lower tax bracket in retirement. Or that it doesn’t matter where they get their income from in retirement, that it’s all going to be the same. And JoAnn Huber, our lead CPA here, she says, “No, that’s not true.” However, she did say that if you do some advanced planning for your taxes in retirement – it’s very possible that you could be in a lower tax bracket in retirement even with the same or higher income.

Planning for Taxes in Retirement is Key

That’s the key though, you’ve got to do that advanced planning for taxes in retirement.

The critical part of it is you have to explore the possibilities. You better start doing something for yourself and your family. Go and execute a plan for yourself. Find out in reality, how this can impact you. Remember the saying, “Genius or idiot. The IRS doesn’t discriminate.”

It’s true; they’re happy to take your money either way!

Taxes and Social Security

A lot of people think that their Social Security in retirement will not be taxable. “What do you mean, my Social Security is going to be taxable?!” The truth is that if all you have is Social Security income, it is tax-free. So, I like to say that Social Security is tax-free unless you disqualify yourself. And so how do people disqualify themselves from having their Social Security tax-free? By having other income that they’ve got to report that is taxable income.

If you can have all the income you want from a Roth, and that’s not going to disqualify the Social Security. But when you start taking distributions from an IRA, 401(k), or pension income, all of a sudden, that’s going to cause some of your Social Security to become taxable.

We also find, you know, people think that they max out their 401(k), whether it’s a Roth or whether it’s traditional, we’re not seeing people save and just the traditional way of having it in a taxable account. But the reason I make that statement is whatever amount of money that is, you’ve already paid the tax on the corpus of that, it’s only on the income or capital gains, that you have a tax. That main part of it that’s feeding that type of return isn’t going to impact your taxability when you access that as an income stream.

Tax Diversification

That leads to this whole idea of tax diversification for taxes in retirement. Most people might think, “Well, what in the world is tax diversification? Because asset allocation or diversification of investments means I have different types of investments. So, what’s tax diversification?”

It means you’re going to have different types of accounts that are subject to different taxation. So, the Roth is going to be tax-free, your IRA is tax-deferred. And then you have your money in your brokerage account, etcetera, that’s already taxable. However, you can have qualified dividends, and you can have municipal bonds. You can have different types of income that are invested in that brokerage account or the bank account, that that come to you and they’re taxed differently. You start combining these things, and that’s where it gets confusing. That’s where people can get taken advantage of, and this is where the whole thing goes to, you know, genius or idiot, the IRS doesn’t discriminate, right? If you don’t do it right, you can be smarter than anybody else out there because the IRS is happy to make their money.

Get Help

These complex components of a quality financial plan are what we deal with daily at Modern Wealth Management. We develop strategies custom designed to your goals, not just financially, but in life as well. Understanding your taxes in retirement and how investments and income are going to be taxed is a huge concept, and we’re here to help you. If you would like to discuss developing a forward-looking financial plan that incorporates a tax strategy, Social Security strategy, and more – give us a call at 913-393-1000 or schedule a complimentary consultation below.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.