Strategizing for a Successful Retirement

In a perfect world we would all start funding our retirement immediately upon entering the workforce and invest heavily in our future securing a large nest egg by which to live comfortably in our golden years. Reality in many cases does not usually rise to that scenario. Much of my own thirties was focused on the needs of raising children and funding college accounts and while I was minimally funding retirement there were other more demanding needs. Serious funding did not start until I was in my forties. Experts encourage us to set aside ten percent of earnings, but frankly I do not think it's enough. Investing only ten percent is likely to leave you far short of any future retirement goals.

Another factor for consideration is where your funds should be invested. On a regular basis, I meet with tax clients whose only retirement income comes from IRA's or employer funded retirement plans leaving them with huge tax bill at tax time. Successful retirement planning should build upon a holistic approach that considers a plan for diversification so that retirees can tap into multiple baskets, some taxable, some not, during the year as a method of minimizing taxes. Often forgotten are the tax implications that the various retirement income streams include. A more diversified approach that allows you to tap different income streams provides the added benefit of potentially reducing the tax burden on social security benefits as well as reducing Medicare payments.

My most savvy tax clients have assembled a team of professionals that include both an astute financial planner as well as a seasoned tax preparer, and those professionals work together before the end of the year to develop a comprehensive plan to minimize tax debt.

A quick breakdown on how your retirement income gets taxed – Money that you invest in Traditional IRA's or through employer funded 401K's and other plans that reduce taxable income while you are working is considered pre-tax and will be taxed when the money is withdrawn during retirement. Money withdrawn during retirement from these types of retirement plans will be taxed as ordinary income with rates ranging from 10% to 37%. Money that you invest in Roth accounts, bank accounts, mutual funds, stocks etc. after taxes have been paid on the income is considered post-tax and will not be taxed again under the right circumstances. Roth IRA's have the added benefit of having earnings grow tax free while dividends and gains that other post-tax funds generate will usually be taxable. So, the original amount in these funds can be withdrawn without tax while the earnings will be taxable.

Tax advantages exist when investments are held for longer periods of time. For example, stocks held for more than one year qualify for long-term capital gains rates while those held for less than one year are taxed as short-term and subject to ordinary income tax rates. Certain qualified dividends that meet holding requirements are subject to the same rate as long-term capital gains, which are lower than ordinary income rates. Capital gains rates are 0%, 15% and 20% with higher earners impacted by a 3.8% net investment income tax. Taxpayers in a lower tax bracket, approximately $45,000 for single taxpayers or $90,000, for married taxpayers will pay 0% tax on gains or qualified dividends. Ordinary income in that same lower range is currently taxed at approximately 12% and can be taxed as high as 37% while capital gains rates have the highest rate of 20%. It bears repeating that the tax rate for capital gains and qualified dividends is 0% for taxpayers in the lower tax bracket.

If you take a holistic approach to funding your retirement by placing your investment eggs in multiple baskets, your retirement years can include strategies to minimize income taxes. Your financial and tax advisors can develop a plan that includes filling the lowest tax brackets with income thus holding the tax that you pay at lower rates. This is critical and effective in reducing tax on social security benefits and especially since Medicare rates are now income based. I have witnessed firsthand the absolute tax magic that can incur when clients are able to tap different income sources, balancing both taxable and non-taxable sources all while living an amazingly comfortable retirement life. Clients that invest in a diversified method create opportunities for golden years of retirement with portfolios that meet their financial needs all while minimizing their tax exposure, and that my friends is a winning combination!