Retirement is an exciting new chapter, a time to enjoy the fruits of your hard work and sacrifice. But here’s something many financial advisers and retirees overlook: Tax planning doesn’t stop when you stop working.
Making the right tax decisions can significantly boost your retirement lifestyle, while also benefiting your spouse, children and other heirs.
This article is written by CFP Connor Zimmer, an investment adviser representative at Rooted Wealth Advisors, Inc. Connor’s background in comprehensive financial planning and investment management helps him harness his passion to help clients envision and create a road map to achieve their goals.
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In this article, we’ll show you how to create a tax-efficient strategy that maximizes your retirement and legacy.
Understanding the tax landscape in retirement
If you’re like many of our clients who are just retiring, you’re looking forward to sipping coffee on your patio on Monday morning, taking that trip you’ve always dreamed of or spending more time with friends and loved ones. The hard part of the journey is over, and now you get to really enjoy life.
You might think that the time for financial planning is over. But wait: There’s a bigger opportunity now, more than ever, to implement tax planning. While you can kick your feet up in retirement, make sure present-day you are watching out for future you.
One of the many changes as you begin your retirement journey is where you get the income to pay your bills. Gone are the days of regular paychecks, replaced by Social Security, pension benefits and withdrawals from retirement accounts. But each of the following income sources is subject to different tax rules that can affect your overall financial health:
1. Maximizing Social Security benefits
Did you know up to 85% of your Social Security benefits can be taxed? If your combined income exceeds a certain threshold, you could be paying more in taxes than necessary.
Timing your retirement withdrawals and managing your income sources strategically can minimize the tax burden on your Social Security benefits.
2. Tax-efficient withdrawal strategies
Traditional IRAs and 401(k)s may offer tax-deferred growth, but withdrawals from these accounts are taxed as ordinary income.
On the other hand, Roth IRAs provide tax-free withdrawals. By converting some of your traditional savings into Roth accounts, you can reduce future tax liabilities and enjoy tax-free growth.
3. Managing investment income
Investments in taxable accounts can generate dividends and capital gains, both of which are taxable. A well-planned, tax-efficient investment strategy can help you minimize the impact of these taxes on your retirement.
4. Estate planning and inheritance
Tax-efficient strategies don’t just help you — they also protect your legacy. By planning ahead, you can minimize estate and inheritance taxes, ensuring your heirs inherit as much as possible.
It can be difficult to assess the true value of a cohesive tax plan. That’s why we suggest going through advanced tax planning to learn the true cost savings of something like a strategic Roth conversion.
If you can see the value and the math makes sense, you may realize you have been leaving thousands (or even tens of thousands) of dollars on the table by not taking advantage of it.
I once spoke to a couple (who are now clients) who had saved millions in assets yet had a low taxable income. Their goal? To save as much as they could to leave their kids better off than they were.
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My clients didn’t consider, however, that with their children’s high-paying jobs and the non-spousal IRA inheritance rules, their kids would be taxed over 40% on the money they left to them! Meaning the true value of their inheritance was just over half of what they thought it would be.
With some meaningful tax strategy, we were able to cut the projected taxes by over half. That is the power of advanced tax planning.
Where many financial advisers have too narrow of a focus
How does the average investor gauge their adviser’s success? If you said “rate of return,” you’re right! We all want as high of a return as possible, right? Of course we do. But what else should your adviser be doing?
The reality is that most advisers talk about one thing only: investment returns. If it was a good year, they’re probably happy to show you their success. In a year of high market volatility, perhaps not so much.
But shouldn’t an adviser be doing so much more? After all, they are financial advisers, not just investment advisers. Or, at least, they should be!
A truly independent, fiduciary adviser should be talking with you about not only investments, but taxes, income strategy, health care and estate planning. Most don’t, either because they lack the expertise or are missing the credentials to do so.
Do you know why many advisers don’t discuss Roth conversions? It’s because after taxes are paid, the assets under their management decrease, meaning they receive lower fees. That is certainly a conflict of interest.
Is your adviser doing everything they can, or are they simply acting as an asset manager?
So, what are some of the strategies your adviser could suggest for better tax efficiency in retirement? Here are a few:
1. Diversify your retirement accounts
Build a mix of taxable, tax-deferred and tax-free retirement accounts to give yourself more flexibility in retirement. This diversification allows you to pull from various sources, lowering your overall tax burden.
2. Implement Roth conversions
Taxes are at historically low rates right now, but that won’t last forever. Starting in 2026, tax rates are set to increase to their previous levels.
Converting some of your traditional savings into Roth IRAs today could save you thousands in the long run.
3. Plan for required minimum distributions (RMDs)
At age 73 (or age 75 if you were born in 1960 or later), the IRS requires you to take minimum distributions from traditional IRAs and 401(k)s. Without careful planning, these withdrawals could push you into a higher tax bracket.
A well-thought-out RMD strategy can help reduce this impact.
4. Tax-loss harvesting
Offset capital gains with capital losses to reduce your overall tax bill. By reviewing and rebalancing your portfolio regularly, you can take advantage of tax-loss harvesting to minimize taxes on investment gains.
5. Consult a tax professional
Tax laws are complex and change often. Working with a tax adviser or financial planner can help you navigate these rules effectively and ensure your strategy is up-to-date and optimized for your unique situation.
Whether we like it or not, taxes have a huge impact on our lives. That doesn’t end once you stop working.
One of the most common things I hear once we begin the tax planning process with our clients is, “I wish we had been doing this for years.” Don’t let tax planning opportunities pass you by and live with the regret of the taxes you could have saved.
By having a cohesive tax strategy, you could be saving yourself tens if not hundreds of thousands of dollars over your lifetime. It can even save your beneficiaries money as well, meaning they get more of your hard-earned legacy.
Whether you’re in retirement already or just a few years away, don’t make the mistake of celebrating before you hit the finish line. It’s a good idea to utilize a tax professional and financial adviser to ensure you are making the most of your money.
After all, it’s not just about how much you’ve saved — it’s about how much you keep.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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