The Tactical Use Of Retirement Distributions

Taxes are the largest expense in retirement. Learning the basics of income taxation should be at the top of retirement education. Tax management is not just during the retirement accumulation and distribution phase, but also the tax consideration of investments and savings vehicles.

Here are some basic tactics to consider based on your effective tax bracket and if you can control your income. Keep in mind that the more tax diverse your portfolio is, the tactics can become more elaborate to reduce your tax bill.

1) Under the current tax code the standard deduction and personal exemptions can neutralize some of your taxable income during retirement. Non-qualified deferred monies like annuities can be designed to delay payments, i.e. forestalling a taxable event. Forestalling is just delaying taxes, it’s not eliminating taxes. But tax deferral has its own economic benefit during accumulation. HSA funds can pay for insurance premiums like long term care, disability and medical coverage, even Medicare Part B payments. HSA funds can also pay for legitimate medical expenses. Tax-free income can be generated from reverse mortgages, policy loans from TAMRA compliant cash value life insurance and Roth IRAs. So tax management can come in handy in retirement if you have tax diverse products.

2) Positioning “after tax” distributions as your first option before your qualified monies may have significant tax favored results such as lower capital gains treatment as one example. Again distributions from reverse mortgages, cash value life insurance, Roth IRAs and HSA accounts are not taxed and are not includable in the provisional income test or Social Security benefit taxation. 

3) Deferring your Social Security benefits to age 70 will maximize your Social Security income and delaying qualified plan monies to age 70½ will allow an additional investment or savings cycle that potentially could increase your account just before retirement.

These are basic considerations for retirees to ponder before they initiate income.