In a world where financial security post-retirement is on everyone’s mind, expert insights offer invaluable guidance. A founder and financial adviser dive into their tried-and-true methods to ensure your hard-earned money goes further. From using trusts for tax efficiency to converting to Roth annuities, this lineup of advice covers a comprehensive approach. Discover seven critical strategies that these specialists trust to optimize your retirement income and protect it from hefty taxes.
- Use Trusts for Tax Efficiency
- Diversify Income Streams
- Optimize Account Withdrawals
- Invest in Roth Accounts
- Clarify Retirement Objectives
- Implement Proactive Tax-Mitigation Strategies
- Convert to Roth Annuity
Use Trusts for Tax Efficiency
Trusts can be an invaluable tool for managing taxable income and supporting beneficiaries during retirement. By strategically allocating assets and income streams into different types of trusts, we can help minimize your overall tax burden while ensuring your loved ones are taken care of.
I’ve helped countless clients at Estates Done Right implement trust-based strategies that not only reduce their tax liability but also provide greater control over their wealth distribution. It’s amazing to see the peace of mind this brings to families as they navigate their golden years.
Thomas Petrelli
Founder, Estates Done Right
Diversify Income Streams
As an experienced financial advisor specializing in high-net-worth clients, I approach tax planning for retirement income holistically, considering each client’s unique financial situation and goals. The key is to create a diversified income stream that balances withdrawals from taxable, tax-deferred, and tax-free accounts.
One effective strategy is to utilize Roth conversions strategically in lower-income years to shift future tax burdens. Additionally, I often recommend harvesting capital losses to offset gains, leveraging qualified charitable distributions to satisfy RMDs, and timing withdrawals to stay within lower tax brackets. For clients with significant assets, we may explore more advanced techniques like establishing donor-advised funds or charitable remainder trusts to optimize tax efficiency while supporting philanthropic goals. Implementing tax-efficient withdrawal strategies, such as prioritizing RMDs, followed by taxable accounts before tapping into tax-advantaged accounts, can help manage tax brackets effectively.
Ultimately, the goal is to maximize after-tax income throughout retirement by carefully managing the timing and sourcing of distributions.
Jeffrey Barnett
Financial Adviser, Fintegrity
Optimize Account Withdrawals
When approaching tax planning for retirement income, a key strategy is to carefully consider which accounts to take funds from—and when. For example, it’s often beneficial to let tax-deferred retirement accounts grow for as long as possible before taking distributions, while depleting non-retirement funds first. This approach helps manage taxable income more efficiently; but more importantly, it should make the funds last longer. Asset location is also part of this strategy, where you should optimize which account holds specific assets, based on their tax efficiency. The least tax-efficient assets should ideally go into the retirement accounts.
Roth conversions can also be used strategically in lower-income years to minimize future tax burdens. Additionally, you have to strategize around how income from various sources will affect your Social Security and Medicare.
If you are charitably inclined, or want to be in the future, you can use a Donor-Advised Fund and/or Qualified Charitable Distributions to reduce taxable income.
In general, there are usually various sources of both fixed and variable income. It is easy for these income sources to push you into higher income tax brackets, so careful planning is essential.
Jirayr Kembikian
Co-Founder, Citrine Capital
Invest in Roth Accounts
According to Finder’s Consumer Confidence Index, 75% of respondents feel stressed about their finances. Investing through Roth accounts, such as a Roth IRA or 401(k), is an excellent way to boost your retirement income. Roth contributions are taxed, but withdrawals in retirement are entirely tax-free. You must have income below an annual threshold to qualify for a Roth IRA, but there is no income limit to participate in a workplace Roth.
If you have traditional retirement accounts that require you to pay income taxes on distributions, one empowering strategy is converting a portion to a Roth IRA. You can make Roth conversions of any amount no matter your age or income. However, since they increase your taxable income, it’s wise to make Roth conversions in years when you have lower income, such as after retirement. That allows you to pay the lowest tax rate possible.
Laura Adams
Nationally-Recognized Finance Expert & Award-Winning Author, Laura D Adams
Clarify Retirement Objectives
Effective tax planning for retirement income can significantly impact your financial well-being. My approach centers on understanding your unique goals and developing tailored strategies that encompass various retirement accounts, including traditional IRAs, Roth IRAs, 401(k)s, and more.
The first step in tax planning is clarifying your retirement objectives. Are you aiming to gift to loved ones, leave a charitable legacy, or maintain a lower tax bracket? Each client’s situation is unique, requiring a personalized approach to timing distributions and minimizing taxes.
Roth conversions can be beneficial, but they depend on your financial mix and goals. We analyze your pre-tax, Roth, and after-tax funds, along with your age and tax bracket, to determine if a conversion aligns with your strategy.
RMDs are a critical factor as you near retirement. Taking too much too late can increase state, local, and federal taxes, as well as Medicare premiums due to IRMAA surcharges. We develop strategies that manage RMDs effectively, minimizing tax liabilities.
For those inclined to give, we explore options like Qualified Charitable Distributions (QCDs). The choice depends on your preferences, allowing us to optimize the impact of your charitable contributions.
State taxes play a vital role in retirement planning. We assess pensions subject to state taxes, whether your state taxes Social Security, and other income sources to ensure you’re fully aware of your tax landscape.
Withdrawal sequencing should align with your goals. For example, if you wish to leave non-qualified assets to heirs, we might prioritize spending down retirement accounts first, allowing for strategic growth elsewhere.
Social Security can be favorably taxed based on your income and spending. Evaluating your pre-tax accounts and Roth conversion options helps us create a plan that optimally manages your tax exposure.
Lastly, we consider Medicare premiums, the potential impact of IRMAA, and upcoming changes like the potential sunset of the Tax Cuts and Jobs Act in 2025. Addressing estate planning, especially regarding the lifetime gift and estate tax exemption, is crucial for providing comprehensive advice.
Patrick Clark
Cfp®, Finance Roadmap Planning
Implement Proactive Tax-Mitigation Strategies
You have to use proactive tax-mitigation strategies. One of the first things to look at is when you plan to draw from these accounts. What will your tax bracket be when that takes place? If you’re going to be in a lower tax bracket prior to needing to take distributions, it may make sense to take them sooner rather than later or look at a Roth conversion. This could help minimize taxes later and be useful from an estate-planning perspective.
There are also other ways to offset taxes owed on pre-tax accounts, such as the Net Unrealized Appreciation option with employer stock in a 401(k), donating your RMD to charity, and others as well. Make sure that you’re not taking a distribution prior to 59 1/2 to avoid the 10% penalty. If you do have to take it prior to 59 1/2, you may opt for a 72(t) distribution schedule, which would allow you to take the distributions penalty-free.
However, that comes with strings attached, so make sure you’re aware of all the nuances prior to that election. At the end of the day, the best advice is to speak with a professional BEFORE making any decision. Being proactive with tax planning is always better than being reactive.
William SNODGRASS
President, Matt25 Capital
Convert to Roth Annuity
A key strategy in retirement tax planning is converting traditional retirement accounts to a Roth Annuity. With a Roth Annuity, you pay taxes upfront when converting from a tax-deferred account like a 401(k) or traditional IRA, but all future growth and withdrawals are tax-free. This can be a powerful tool for retirees seeking to minimize taxes on their distributions.
According to IRS rules, Required Minimum Distributions (RMDs) can significantly increase taxable income, potentially pushing retirees into higher tax brackets. Converting to a Roth Annuity before RMDs begin allows retirees to avoid these forced withdrawals.
This strategy can be especially beneficial as tax rates are expected to rise in the future, allowing retirees to hedge against potentially higher future tax rates. Moreover, with no RMDs on Roth Annuities, retirees maintain greater control over their retirement income, helping them manage both tax liability and financial flexibility.
For those concerned about running out of retirement income, converting to a Roth Annuity can provide both tax-free income and peace of mind.
Jonathan Globerman
Co-Founder, CEO, The Policy Shop
