Taxable Accounts
Interest, dividends, and realized gains may create current tax obligations.
It Is Not Just What You Earn — It Is What You Keep
Taxes can have a significant effect on retirement income. Tax mitigation means organizing retirement income and withdrawals in a thoughtful, tax-aware manner.
The Three General Tax Categories
Many people enter retirement with money in several types of accounts, each with different tax treatment. The way those accounts are used may affect current taxes, future taxes, Social Security taxation, Medicare costs, and the amount eventually transferred to beneficiaries.
Tax-Deferred Accounts
Traditional IRAs, 401(k)s, and similar accounts generally allow taxes to be postponed, but withdrawals are typically taxable.
Tax-Free Accounts
Qualified Roth withdrawals are generally received free from federal income tax when applicable requirements are met.
Having money in different tax categories may provide greater flexibility when creating retirement income.
Why Withdrawal Order Matters
The account you use first may affect more than the taxes due that year. Withdrawals may influence:
- Taxable income
- The taxation of Social Security benefits
- Medicare income-related surcharges
- Capital gains treatment
- Required distributions
- The taxation of a surviving spouse
- The after-tax value received by beneficiaries
A tax-efficient withdrawal strategy should be coordinated with your overall financial and retirement plan.
Required Distributions
Certain retirement accounts require distributions after the account owner reaches the applicable starting age. These distributions may increase taxable income even when the money is not needed for living expenses. Planning before required distributions begin may create more choices than waiting until distributions are mandatory.
Roth Conversion Planning
A Roth conversion moves money from a tax-deferred retirement account into a Roth account. The converted amount is generally taxable in the year of conversion. A conversion may be useful in some situations, but it is not automatically beneficial. Important considerations include:
- Current and expected future tax rates
- Available funds to pay the tax
- Medicare premium implications
- Social Security taxation
- Time horizon
- Estate planning goals
- Market conditions
- The needs of a surviving spouse
Conversions should be evaluated carefully and coordinated with qualified tax and financial professionals.
The Widow or Widower Tax Concern
After the death of a spouse, the surviving spouse may eventually file as a single taxpayer while living on many of the same assets and income sources. This may result in a higher effective tax burden. Retirement tax planning should consider both spouses’ lifetimes, not just the current year.
Tax Planning Is an Ongoing Process
Tax laws, income needs, account balances, and personal circumstances change. A retirement strategy should be reviewed periodically to identify opportunities and avoid unintended tax consequences.
We help clients understand how their retirement income sources may interact and where tax-aware planning may be beneficial. We do not provide legal or tax advice unless properly licensed to do so. Tax strategies should be reviewed with a qualified tax professional.
Schedule a retirement tax strategy consultation to identify questions and planning opportunities to discuss with your tax advisor.
No obligation. Speak directly with a senior planner at National Planning Associates.
- (602) 448-0263
- jay@nationalplanningassociates.com
- 1444 S Belcher Rd #164, Clearwater, FL 33764
- Hours: Monday–Friday, 10am–5pm
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