By: John P. Napolitano, CFP®, CPA, PFS, MST

For those who saved and invested, one of the hardest decisions to make during your retirement may be which accounts should fund your spending.

Many savers have traditional retirement accounts, possibly a Roth retirement account and after tax money from savings or investments.

The initial reaction by many retirees is to spend the non-taxable money first such as savings or after tax investments that you have. While this may leave you with a lower tax bill at year end, there may be other strategies that can hedge your choices in light of possible future tax changes.

For example, if you have retirement accounts, and you haven’t yet reached the magic withdrawal age of 72, you don’t need to withdraw anything from them. But if your retirement accounts are large, and you know that you’ll be burdened by larger taxable distributions later in life, consider this. The possibility is that those larger retirement contributions alone will increase your tax bracket to something higher than you’d like. If you know that you’ll be in a low tax bracket this year, consider withdrawing some retirement money now, using up some of the lower tax brackets that you may not be using if you are only spending after tax money. If you make withdrawals that are above and beyond your living needs, consider shifting these assets to a Roth IRA where they’ll remain tax and withdrawal free for life.

This combination of starting to reduce your retirement accounts earlier along with some Roth conversions will make your ultimate required minimum distributions smaller later. It’s important that Traditional IRA account owners should consider the tax ramifications of executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. The truth is that we don’t know if tax rates will be higher this year, next year or in ten years. As a result, any strategy to hedge against possible future adverse changes may be helpful or harmful in the long run.

A similar choice may needed with respect to your savings and investments. For example, if your lifestyle requires $100,000 of yearly income and you’re retired, the inclination for many is to spend your cash and not dip into investments that may have a capital gains tax if sold. Doing so may leave you with unusually low taxable income for the year. That may be fun come filing time, but in future years where you may have significantly more income, you may regret not paying some taxes on gains this year while in a lower tax bracket. In fact, if you’re married and your taxable income is less than $80,000, you’ll pay no federal tax on capital gains. This may be ideal for early retirees with little to no taxable income.

If there are pension decisions to make at retirement, consider your options for single life or joint life payouts, and delaying any payments if you have any of the above tax planning opportunities. Start your 2021 forecasting now so that you’ve got the next three months to enact the plan that’s right for you.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice.

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200. 1-05058911 (10/2/20)