Tax Planning for Retirement 101
- By Russ Hodgson, CFP® and Joe Pond, CFP®
Every comprehensive retirement plan should begin with well-defined retirement goals and tax planning crafted with a team that specializes in both. Whether you’re already enjoying your golden years, or setting yourself up for long-term financial success, use this quick guide to ensure you are covering your bases.
Note: this useful eBook will help you consider how to transition from a monthly paycheck to a retirement income. Have you truly thought of everything you need for a seamless transition? And if you are already retired, what could you possibly add to your retirement agenda?
You can also refer to these insightful resources to begin proactive tax planning after you explore the contents of this page:
- Tax Planning for Wealthy Individuals
- 6 Tax Secrets the IRS Doesn’t Want You to Know
- How to Avoid Paying Taxes with Charitable Giving
- Potential Tax Law Changes Could Be On the Horizon
- Retiree Tax Document Checklist: What Documents Do I Need to File Taxes?
- The Definitive Guide to Retirement Income Planning
In this guide we will cover:
What is Tax Planning?
An efficient financial planner will, at some point, discuss the essential component of tax planning with their clients. Tax planning is the process of coordinating the various aspects of a financial plan with an overarching tax strategy in mind. This process aims to minimize tax liability as much as possible.
A solid tax plan will include both a list of actions to execute and a timeline for when to implement them. Each step should work in tandem with others to achieve maximum tax efficiency while also keeping the pursuit of financial goals on track.
It is important to note that tax planning differs from tax preparation. Tax preparation is specific to the completion and filing of a tax return, whereas tax planning is an ongoing, year-round process. Tax planning is the strategizing that happens before tax preparation so that your tax preparer can congratulate you on a low tax bill in April.
Why Tax Planning Should Be Part of Your Retirement Plan
In order to make the transition into and through retirement as smooth as possible, you’ll need a forward-looking approach to your finances, including your taxes. After all, the transition to retirement arrives with a host of new hurdles, as well as new opportunities. The actions you take now (or don’t take) can have massive implications for the future, regardless of whether you are still in your working years and devising your path to financial independence or already enjoying your golden years.
A financial plan that is tax-efficient or, in other words, that minimizes your tax bill, can save you tens, if not hundreds, of thousands of dollars. The money you save by not paying Uncle Sam more than you truly need can be redirected to pursuits that align more closely with your goals and values, such as charitable giving, traveling, or more time with family and friends.
What Transitioning to Retirement Means for Your Taxes
By the time you start to transition to retirement, your taxes have probably already begun to change considerably. Child tax credits that may have benefitted you in your younger years have probably evaporated by the time retirement rolls around. It’s likely that you have paid off or will soon pay off your mortgage, which means no more mortgage interest deductions.
At the same time, you may find yourself in a lower income bracket as you transition to sources of income not derived from a paycheck. As such, there may be new opportunities for deductions and credits.
But that’s just the beginning.
A healthy retirement plan will promote a variety of sources for retirement income. Understanding the tax rules that govern each source can be a tall order, but the importance of this task can’t be overstated. This knowledge will enable you to diversify your assets into a mixture of tax-deferred, tax-free, and taxable accounts in order to more comfortably shoulder tax burdens at each stage of retirement.
Plus, arming yourself with a thorough understanding of how your assets will be taxed can help optimize the process of transforming each asset into retirement income.
How Your Tax Planning Strategy Fits Into Your Retirement Plan
Retirement tax strategies should account for how your income will change, how withdrawals from each of your retirement accounts will be taxed, how you can maximize capital gains, and much more.
Ideally, you’ll develop a retirement tax plan well before 
you actually throw in the towel. That’s because, as you accumulate savings for retirement, you would be wise to consider how your savings can reduce your taxable income, whether you’re eligible for the Saver’s Tax Credit, and how you anticipate your current income bracket will compare to your future income bracket (this assessment should in turn affect which retirement accounts you prioritize with contributions).
Once you retire, you will have a host of new considerations to factor into your taxes. Here are just a few elements of your retirement plan that should also be included in a tax plan:
Withdrawals
Cash flow shouldn’t be the only consideration when planning withdrawals from your retirement accounts. You’ll want to make sure that your withdrawals don’t tip you into a tax bracket that you aren’t prepared to enter. Additionally, you’ll need to account for Required Minimum Distributions (RMDs), which carry a hefty tax penalty when not executed properly.
Health insurance
Unless you have a pension, you will likely lose access to employer-sponsored health insurance at retirement. And if there’s a gap between when you retire and when you are eligible for Medicare, you will need to consider not only the cost of new plans but also the tax implications of participation.
For example, if your new plan has a high deductible, then you may be eligible to participate in a Health Savings Account, which can have enormous benefits—tax and otherwise. Additionally, if you itemize your deductions, it will be important to learn which medical expenses for retirees are deductible to pursue even more savings.
Social Security
Many Americans need to pay taxes on their Social Security benefits. To discern whether you will need to do so, there’s a simple formula you can follow: adjusted gross income + taxable interest + half of your Social Security benefits. If the sum is greater than a certain amount (this amount will depend on the year and your filing status), then expect to pay taxes on your Social Security benefits.
The rate of those taxes will depend on your total retirement income. To learn more, consult your financial planner and visit the IRS’ Social Security benefits planner webpage.
Properly timed tax payments
While working, you can count on your employer to automatically deduct a portion of your taxes with each paycheck, which reduces or eliminates your tax liability come April. However, depending on your assets, transitioning to retirement can mean transitioning away from automatic deductions. In some cases, you will need to make quarterly payments unprompted by the IRS, or else face a penalty at the end of the year.
In some cases, it’s possible to opt for automatic tax withholding for each withdrawal or distribution. Check whether this option is available for your accounts and, if it is, consider opting in to avoid penalties and save yourself from a hefty year-end tax bill.
Often Overlooked Tax Breaks For Retirees
Increase in standard deduction
At age 65, Americans are entitled to a larger maximum standard deduction.
Taxpayers 65 plus or blind can claim an additional $1,400 on their standard deduction in 2022. If they are the head of household or single they can claim $1,750). The additional deduction amount can be doubled if they are 65 or older and blind, which is carried over from the 2021 standard deduction.
If claimed as a dependent on someone else’s tax return, the 2022 standard deduction is capped to the greater of $1,150 or your income earned with an additional $400.
Medicare premium deductions
Many retirees find themselves self-employed even after they have officially retired. In an effort to either stay occupied or bring in a bit of extra cash, they begin applying their years of experience and expertise to a modest consulting business. Or perhaps they have more time to spend on a hobby that results in a small retail business.
Regardless of how it happens, entering into self-employment can translate to savings come tax time. That’s because the self-employed are eligible to take deductions for Medicare Part B and Part D premiums.
Another tax loophole for those over the age of 65 is to itemize their deductions and claim medical expenses. If they exceed a certain percentage of your Adjusted Gross Income, then you can claim a deduction.
Additional IRA contributions from a working spouse
If your spouse is still working, they can contribute up to $7,000 to your IRA annually, which grants both you and them a tax-sheltered savings vehicle to draw on for retirement income.
Qualified charitable distributions
Qualified charitable distributions (QCDs) are available to anyone over the age of 70½. A QCD is a donation made to charity via funds from an IRA. This donation can qualify as an RMD and does not increase taxable income.
Roth conversions
The RMD rule does not apply to Roth IRAs, which means that slowly converting small amounts of your traditional IRA to a Roth IRA can provide much-needed flexibility later in retirement. Roth IRA owners can, for example, tap into their accounts for extra funds without increasing their taxable income.
Brokerage accounts
Brokerage accounts are an essential component of retirement plans, but like most other essential components, they are not safe from taxes. After spending time and effort curating and monitoring a portfolio, you will want to make sure that you get the most out of your investments.
As you devise your tax plan, take note of the fact that it’s best to hold appreciated investments for at least a year in order to be eligible for capital gains taxes, rather than the comparatively higher income tax rates. You may also choose, in partnership with your financial planner, to pursue tax loss harvesting as a means of reducing your tax bill.
Why Some Financial Professionals Do Not Offer Tax Planning
Not all financial advisors offer tax planning services. That’s because not all financial advisors possess the knowledge required to do so.
Yet, tax planning is necessary for reducing tax liability, and it achieves optimal results when executed as part of a broader retirement plan. Without a deep understanding of the many moving pieces that comprise an individual’s financial landscape, it’s almost impossible to develop a strategy that fits together the way a puzzle should.
This means that, although a CPA may be perfectly qualified to prepare your taxes, they are not in a great position to plan your retirement tax strategy unless they are working directly with your financial planner.
The best choice is to find a financial advisory firm that is able to design a tax strategy in-house using a thorough knowledge of tax codes and your unique financial situation.
Tax Planning Services at Advanced Retirement Strategies
Read more about the reactive approach to tax planning versus the proactive approach.
The CERTIFIED FINANCIAL PLANNERS™ (CFP®) at Advanced Retirement Strategies have decades of combined experience helping clients transition into retirement. Using sound investment strategies, extensive social security knowledge, and proven tax strategies, Advanced Retirement Strategies provides resources and services to residents of Bountiful, Utah, and the surrounding area who are eager to make the most of their retirement years.
At ARS, our team works with you to ensure we are taking the necessary steps to either reduce future tax liabilities or maximize tax brackets BEFORE you file annual taxes. This preemptive planning can create exponential tax savings than would any amount of scrambling with different forms during tax season.
If you are within ten years of retirement and have over $250k in assets, click here for a free retirement review from Advanced Retirement Strategies to gauge the efficiency of your investments, income plan, and tax strategies.
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