Retirement planning is tax planning
You can't do one without the other (at least, I wouldn't recommend it)
Happy Wednesday,
With the 2024 U.S. income tax deadline having just passed, I’ve already begun asking all my clients for a copy of their 2023 tax returns.
Your tax return not only tells a story about what’s happened with your finances in the prior year, but it can also be an important tool in your retirement planning.
Yet, most financial advisors don’t even ask about their clients’ tax returns. 🤔
I’m not a CPA or accountant, and I don’t prepare tax returns or help clients with their tax compliance.
But I’m a big believer in ongoing tax planning.
Just think about all the areas of your retirement income planning that have a direct impact on your income taxes.
Social Security
Many people mistakenly assume their Social Security benefits aren’t taxable.
And for some, that may be true. But most of my clients are paying income taxes on at least part of their Social Security.
Up to 85% of your Social Security benefits can be taxed and this depends on the amount of your other income in any given year:
For example, here’s an excerpt from a tax report I can generate for my clients based on their tax return.
This client only had $2,072 of their total Social Security benefits taxed in 2023:
While the numbers above show a client who had the maximum 85% of her Social Security taxed in 2023:
And depending how and when you create your retirement income, it can impact how much of your Social Security is taxed.
As with all taxes, we can’t change the rules but it’s still smart to know what they are and how to plan accordingly.
IRMAA
“IRMAA” stands for Income-Related Monthly Adjustment Amount.
Your Modified Adjusted Gross Income (MAGI) will impact your Medicare Part B and Part D premiums two years later.
So your 2023 MAGI will impact your 2025 Medicare premiums for Parts B and D.
The table below shows the MAGI ranges and corresponding premium adjustments for one of my clients. In 2025, they’ll be paying an additional $83 per month based on their 2023 income.
And if you go $1 over the limit into the next “bracket” you’ll get the full premium adjustment.
Another great example of why it’s important to consider your taxes alongside your retirement income plan. If you need to take some additional funds out of your IRA this year, it’s a good idea to know where your income falls relative to these IRMAA brackets.
This is something I do for my clients.
Required Minimum Distributions
If you have money in a 401k, 403b, IRA or other tax-deferred retirement account, the IRS isn’t going to let you defer those taxes forever…
Instead, once you reach a certain age you’ll have to start taking out required minimum distributions (RMDs).
Based on recent legislation, here are the current RMD start ages:
But in some cases, it might be smart to start using your retirement dollars ahead of your RMD age.
Here’s a tax analysis for one of my clients:
The orange part of the chart shows their RMDs starting at age 75. And they just keep getting bigger.
While each person’s situation is different, it may be smart to start taking some of these funds out of your retirement accounts well before age 75 to spread out the tax liability and help reduce the size of the RMDs down the road.
These funds could be converted into a Roth IRA or simply be put into a taxable brokerage account to be used in the future.
Just know that I’m not a Roth IRA conversion super-fan like some advisors seem to be as I’ve written about here:
Once again, your RMDs are another good reason to consider your taxes alongside your retirement income plan.
Social Security, IRMAA, and RMDs are just 3 among many examples of how a retirement income decision can have a material impact on your taxes.
Others include:
Capital gains & losses relative to other income
Tax diversification - how much do you have in taxable vs tax-deferred vs tax-free accounts
Qualified Charitable Distributions (QCDs)
I’m not a fan of letting the “tail wag the dog” when it comes to your taxes.
While I’ve yet to meet anyone who wants to pay one cent more in taxes than they’re legally required, I don’t think you should focus on lowering your tax bill at the cost of enjoying your financial resources and living a great life.
However, with some proper planning that includes an ongoing awareness of your tax profile and the ability to run some what-if tax projections, I believe you can live your great life AND make some more informed tax-aware planning decisions along the way.
And it all starts with your most recent tax return.
For my clients reading this, that was a not-so-subtle reminder. 😉
What do you think about the relationship between your retirement income and your income taxes?
And if you have questions about any of the above or would like me to dig deeper into this topic in the future, let me know.
Have any suggestions?
I love hearing from readers, and I’m always looking for feedback.
Hit reply and say hello - I’d love to hear from you.
And as always, thanks for reading.
Until next Wednesday,
Russ