…and taxes

A picture of the other Emirates cable car over the Thames.  You go for a very long way, on a cable, over water.  Screaming was heard from our car.


Taxes – retirement may provide planning opportunities

“…in this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

“Anyone may arrange his affairs so that his taxes shall be as low as possible…” Judge Learned Hand

Dan and Mikala

I had the opportunity to talk to Dan and Mikala (pseudonyms) this week about their retirement plans. Because of their early planning and good benefits, they are in pretty good shape for full retirement next year. In fact, they reminded me of Bob and Sarah in the Success Story post. As part of the Dan and Mikala discussion, we talked about something that Bob originally discussed with me, taxes.

Mandatory, boring, but important disclaimer

I am not giving tax advice and do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Retiree planning opportunities

As always, you should strongly consider using an Enrolled Agent, CPA, or tax attorney to assist with your tax planning.  That being said, there are constraints and opportunities for retiree tax planning that you may not have had when working.

Required Minimum Distributions (RMD)

As part of the tax deferral deal with the government, you got to defer taxes on 401(k), IRA, and certain other types of retirement money. The second part of that deal is that the government requires you to remove a portion of those funds, based on your life expectancy, when you turn 70.5, to collect the taxes on the deferred funds (and any growth).

The amount you will need to withdraw is dependent on the size of the pot of deferred money and your age. It may be small or it may be large, but, regardless of size, there may be planning opportunities for you. As an example, you may find yourself in a low tax bracket in your early retirement years (10, 12, or 22% marginal rate). If you look out to age 70.5, you may find that the RMD moves you to the next higher rate (12, 22, or 24%). (The rates go all the way to 37% – if the higher marginal rates apply to you, quit reading and go to your CPA and estate tax attorney now.)

You may have a planning opportunity in earlier retirement years to take post-59.5 distributions from your deferred pot of money and ‘use up’ your lower marginal tax rate for a given year. That would leave less in the pot for 70.5 and beyond and may leave your RMDs taxed at one of the lower marginal rates when you hit 70.5.  If you, hypothetically, could get money out at the 12% rate early, you might save 10 percentage points over getting hit with the 22% marginal rate at 70.5. Heck, even a 2% saving, from 12% to 10%, is a win!

Even after age 70.5 there may be opportunities for planning for the lowest rate. One way could be taking a larger amount one year and lower the next, but it will depend on age, amount in the account, and tax rates at the time.

But there’s more

There are other factors to consider, such as capital gains on non-tax qualified accounts, non-taxable funds, eligibility for social service programs, and partial taxation of Social Security. You, and likely your tax professional, will need to factor these in also.

Martin Luther King, Jr. Day

I am writing this on Martin Luther King, Jr. Day, also known as the Martin Luther King Day of Service. Last week I finally got to attend the weekly retiree breakfast with the retired guys from the old neighborhood.  I was happy to hear of some volunteerism – Habitat for Humanity. Good for the community and the RAP (Retirement Activity Plan). I just finished my IRS volunteer recertification and will again volunteer with the IRS VITA program for tax season. What’s your volunteer plan?

Actions you can take include:
Assess your opportunities for RMD tax planning. Talk to your friends about who they use for tax advice. Remember, only Enrolled Agents, CPAs, and attorneys can legally give tax advice for your specific situation.

Find a volunteer activity that engages you and uses your talents. www.volunteermatch.org is a great website to help find opportunities in your area that fit your time and talents.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
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