Retirement Tax Tactics
Posted on November 3, 2015 by bob in MoneyWise
“…the difference between using a refined retirement income strategy and winging it can be 
thousands of dollars over a period of years.”
Since the tax impact of pulling money out of different account types is not the same, retirees can stretch their money by making well-informed choices about which account to tap for spendable dollars. Since the decision-making process can be complex, seeking the input of a qualified professional in choosing your strategy may help. Whether you do that or not, here are some things to keep in mind.
1. Consider the income tax consequences of any withdrawal. Money taken from a traditional IRA is taxable unless it is deemed a withdrawal of cost basis related to a non-deductible contribution. Money taken from a Roth IRA is not taxed. Money taken from personal savings or investments is not taxed, but if you have to sell something and realize a gain to free up the cash you withdraw, the gain is taxable.
2. Federal and Alabama income tax rates are progressive. You will pay a higher tax rate on slices of taxable income that exceed certain threshold amounts. The lowest three tax rates and associated income caps amounts for 2015 are shown below for single people and married people filing jointly. For instance, a single person would owe 10% tax on her first $9,075 of income, 15% on the slice from $9,075 to $36,900, and 25% on the amount between $36,900 and $83,250.
Single Married
10% 9,075 18,150
15% 36,900 73,800
25% 83,250 148,850
3. Starting at age 70½ the IRS mandates certain minimum withdrawals from traditional retirement accounts (IRAs, for example). For planning purposes you need to estimate what the required minimum distribution will be for you and, if married, your spouse.
4. You need to project the tax items over which you have limited control or are part of your probable lifestyle. These include Social Security benefits, traditional pension benefits, income from other sources, and itemized deductions, if applicable.
5. Estimate the total you will need, after-tax, from your various accounts each year for the next several years. Be sure to allow for vehicle replacements, home repairs, major travel, etc.
6. Your goal should be to normalize your tax bite over a period of several years. For instance, it is better to manage your withdrawals to stay in the 15% bracket than jumping into the 25% bracket every few years. Knowing how much room you have left in the 15% bracket in a particular year will let you take more out of your IRA that year while staying in a 15% bracket. You can set that extra withdrawal aside in savings for use in a later year. The alternative is that you wait until an emergency occurs and pull extra money out that year, wind up in a 25% bracket, and effectively pay 10% more than you had to on some of the money that you withdrew.
7. By having multiple accounts with different tax attributes, you give yourself more options and greater flexibility. Suppose that you manage your situation so that you are consistently at the top of the 15% bracket. Then an emergency arises and you need extra money. If you take it from your IRA, you will pay 25% of the withdrawal in federal tax (not to mention up to 5% in state income tax). If, however, you have a Roth IRA, you can take the extra money from there tax free.
As with most financial decisions, there are two critical lessons here. First, get the facts. Don’t make an uninformed snap decision. Identify your options and understand the implications before you act. The second is to plan ahead. Don’t wait until you are in a situation before you start thinking about your options.
Depending on your circumstances, the difference between using a refined retirement income strategy and winging it can be thousands of dollars over a period of years. Don’t pay the taxman more than necessary.
Alan Wallace
Alan Wallace, CFA, ChFC, CLU is a Senior Financial Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
