Keep Uncle Sam out of Your Pocket & Increase Your Retirement Income

It’s surprising for most seniors to discover that taxes are generally the number-one annual expense in retirement. Most retirees could keep more of their money every month, if they could just learn the basic tax strategies and rules of engagement. Often, CPAs or enrolled agents are reactive, not proactive, regarding taxes. You have to take control of finances, and that includes taxes.

#1 You Need to Control Your Income
Create categories of income: taxable, tax-deferred and tax-free. Then create a realistic budget. A budget includes monthly expenses with quarterly and annual spending amortized into monthly payments. You should include vacations, family birthdays and holiday spending. Next, develop a retirement timeline starting at age 59½ to age 100, marking retirement milestones along the way by age: like 62, 66, 70, 70½, 85 and your life expectancy.

#2 You Need to Use Your Exemptions, Deductions and Tax Credits Appropriately
An exemption generally applies to you and your family dependents. Each qualified dependent will receive $4,050 in 2016. For higher-income taxpayers, the exemptions may be phased out. So check with your accountant. The proper use of a tax deduction is to reduce taxable income. Once you’ve used up your deductions, deferring income may become a strategy. Many middle-class taxpayers may qualify for tax credits, which go directly against taxes owed.

#3 You Need to Manage Your Required Minimum Distributions (RMDs)
Start managing your RMDs around age 59½ and through age 70½. If you convert qualified plan monies to Roth IRAs or cash-value life insurance, first make sure the income from the conversion doesn’t bump you into an additional tax bracket. Amortizing conversions over a 10-year period can mitigate the current taxable event and pay off later when you generate income from your Roth IRA or cash-value life insurance.

Even converting qualified plans to Roth IRAs over a 10-year timeline, will more than likely leave taxable qualified plan monies at age 70½. So here’s three strategies that can modify the tax impact of your RMDs. FIRST: Qualified Longevity Annuity Contracts (QLACs) can delay a portion of your RMDs. SECOND: Stretch IRAs that allow you to lower RMDs based on a second annuitant like a spouse, child or grandchild. And THIRD: Qualified Charitable Distributions from IRAs, which go directly to non-profit organizations for your charitable giving. The terms and conditions of use for each of these ideas need to be examined before you implement them. Always seek out professional retirement guidance.