A lot of retirees are surprised when they turn 70½ and start taking their withdrawals, only to discover that their tax bill gets a whole lot higher. That’s because the money they take out of their retirement accounts for living expenses is treated as federal taxable income, and they are often taxed at their highest tax bracket.

Income taxes, in fact, can be your single largest expense in retirement.    

In a state of shock, retirees say: “Why didn’t we plan for this?”

This is why I am always touting the necessity of hiring a Financial Planner.  Most people are not aware of the financial consequences of their withdrawals.  

A tax-efficient plan from the start positions you for optimal growth and tax-free withdrawals in the future.  

People who don’t plan often regret it. So, read through this overview, and then book me for a meeting so that we can build a tax-diversified retirement portfolio.

Tax NOW:  Investment Accounts, Bank Accounts

Investments that have a tax consequence “now” or at least before you retire, include (stocks, bonds, mutual funds, etc.).  If you hold them for more than a year, you’ll pay the long-term capital gains rate —which ranges from 0% to 20% depending on what tax bracket you’re in — on any gain you have.  If you hold your investments for less than a year, you’ll pay the equivalent of your income tax rate on your gains (short-term capital gains).  

Tax LATER: IRAs, 401(k)s, 403(b)s

These vehicles offer the ability to make contributions that are fully tax-deductible.   In other words, if you contribute $5,000 to a Traditional IRA in 2017, you will be able to subtract $5,000 from your taxable income when you file your taxes early next year. This results in a smaller tax bill right now. However, there are NO tax benefits when you withdraw.  You’ll pay taxes later at your highest tax bracket in retirement.

Tax NEVER: Roth IRAs, Roth 401(k)s, Insurance

With a Roth 401(k), Roth IRA you make your contributions with after-tax dollars, so there’s no upfront tax deduction, but you enjoy a valuable stream of tax-free income when you’re retired.

There are also a variety of insurance products that allow for tax-free growth and tax-free withdrawals that can be well-suited for investors who are making maximum contributions to their 401K.

Bottom Line – Get A Tax-Efficient Retirement Financial Plan Today

Whenever you are dealing with taxes, it makes sense to talk to an advisor who can devise solutions that meet your particular goals and your specific situation.   The goal is to grow your portfolio to meet your retirement goals and to take advantage of tax breaks so you have greater cash-flow in retirement.  

Let’s find out which is the best strategy for you.  Book a meeting today.

Integrated Life and Financial Planning does not offer legal or tax advice. This material is not intended to replace the advice of a qualified tax advisor or attorney. Please consult legal or tax professionals for specific information regarding your individual situation.

“No theory, strategy or Asset Allocation assures success or protects against loss. This material is for general information only and is not intended to provide specific advice or recommendations for any individual.  To determine what appropriate for you, consult a qualified professional.”