Episode description

While those approaching retirement often calculate the total income they may receive from Social Security, pensions, 401(k) plans and taxable investments, many fail to consider the impact of federal and state taxes. For example, if you and your spouse file jointly and your combined income is more than $32,000, up to 85% of your Social Security benefits could be taxable. If you have a pension, you’ll have to pay taxes when it’s paid out to you. When you start taking mandatory or elective taxable distributions from your Traditional and Rollover IRA and 401(k) accounts, it’s important to know ahead of time whether these withdrawals will significantly increase your tax bill. If you take distributions from an annuity, any interest or earnings will be distributed first as taxable income before non-taxable principal. If you’re thinking of selling your home, you may have to pay capital gain taxes if the profit from your sale exceeds $500,000. And, of course, you may always have to pay taxes on income and capital gains you earn in your taxable accounts. Considering how all of these taxes could really add up, it’s important to start thinking about how to potentially reduce your future tax burden long before you leave the workforce. For example, if you plan to use your retirement money to pay off your mortgage sooner, instead of making one large one withdrawal, consider making a series of smaller annual withdrawals to keep you from moving into a higher tax bracket. Or, if you’re thinking about converting your Traditional or Rollover IRA to a tax-free Roth IRA, you may want to do this after you stop working but before you start taking Social Security benefits, when your annual income may be less. And you may want to change the way your money is invested in your retirement and taxable accounts to achieve an optimal balance of investment returns and tax management. Given the complexity of these decisions, working with an accountant and a qualified fee-only, fiduciary financial planner can help ensure that these challenges won’t significantly tax your patience—or your nest egg.