Six Steps to a Less Taxing Retirement

Even with advance planning and the help of professionals, the realities of finances in retirement become more clear by reviewing a Form1040 tax return. As a consolidator of diverse income sources, exemptions and expenses, it can be used as both a measuring stick and a guide to reduce taxes, perhaps retirement’s least acknowledged and most impactful financial factor. Success in the form of 15% - 20% tax savings can come from meeting certain thresholds.

These steps can contribute to the savings: 

1. Consult a retirement planning specialist in addition to a tax preparer, who is often not trained to see the holistic picture of retirement.
2. Consider the impacts of all income sources on Adjusted Gross Income (AGI) and modified Adjusted Gross Income (MAGI) including pension, dividends, interest, IRA distributions and Social Security, which is taxable at 50% when income sources exceed $34,000, and 85% taxable at $44,000.
3. Postponing Social Security suppresses reportable income and reduces tax exposure. A side benefit is an 8% annual increase in the eventual payment. The onset of payment needs to be a couple’s “we” vs. “me” decision since the surviving spouse will carry the result for their lifetime.
4. Understand that all distributions from qualified plans are taxable, as they’ve never been taxed.
5. Take the full amount of a required minimum distribution (RMD) to avoid a 50% tax. It is possible that, under certain circumstances, the 50% penalty can be appealed within the guidelines of the law.
6. Minimize reportable income through tax management can potentially suppress Medicare premiums which are means tested. Increases of reportable income can raise Medicare premiums by up to $175 a month.

With increased longevity, retirement is more a marathon than a sprint. Proper and holistic planning, with an emphasis on taxes as much as income, can help provide for the dreams of a lifetime.