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Taxes in retirement? –What to consider now

Ever dream about your next phase (retirement) and think about how much less in taxes you’ll pay? Careful, it’s not always the case that you’ll pay less tax. Most people think about what that next phase looks like in terms of their dreams–falling short of considering how much taxes can reduce their income and therefore their lifestyle in the next phase.

So how can you plan for lower taxes in retirement? While you can’t know for sure what the tax rates will be in your next phase, a little homework on the history of tax rates might get you moving in the right direction today to make decisions for your future.

If you Google the historical top marginal tax rates, it will become very clear that todays rates are nearer the historical lows than the highs. In years like 1944, the top marginal tax rate peaked over 90% then down to 70% in 1965, yikes! Having this knowledge will empower you to make an educated decision on changes you might make today for more certainty tomorrow.

Ever talk to someone who is retired and actually, on a percentage basis, pays more than they did in their working days? Unfortunately, it’s common.

There are a few important changes that occur for most at retirement that can initially cause the tax bill to be higher.

  • Mortgage interest deduction is small or non-existent.
  • Children are grown so the exemptions or credits for kids are gone.
  • Charitable deductions are typically less as the checks we’re writing in retirement typically get smaller.

Ok, so you probably see the point of loss of deductions, however, you may not yet know about how your Social Security check can be taxed.

The IRS tracks something called provisional income to determine the percentage of your Social Security that will be taxed. Here are a few common sources of provisional income (not all are listed here):

  • Distributions taken out of your tax-deferred IRAs, 401Ks, etc.
  • Interest from Municipal Bonds.
  • Any rental income.
  • One-half of your Social Security income.

If you are a married couple and your provisional income is over $44,000 you may have up to 85% of your Social Security subject to tax.

So what can you do today to impact your tax bill of the future? How about that Roth IRA or Roth Conversion you didn’t want to make because you’d pay so much in tax today? Or, consider that Roth 401k? Yes, we know, you’ll feel the pain today, perhaps, but, consider whether it’s easier today than it will be in your next phase. In that next phase you have that finite amount of money that you want to last yours and your spouses lifetime and perhaps you even have the dream of leaving a legacy.

There are more ways to reduce and circumvent taxes in retirement, these are just a few that most ought to consider. We find many people don’t know they can “Back Door” contributions to a Roth IRA and/or convert.

We believe that planning today for a reduction in taxes tomorrow makes sense and is not only achievable for most but should be considered.

Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.


Source: Wolters Kluwer CCH.com, The Power of Zero, David McKnight, Ed Slott & Company, LLC – irahelp.com