Planning for Tax Exposure in Retirement
March 30, 2018

You picture life in retirement. You’ve saved and invested. Your financial life is simple and uncomplicated. While this is a dream for many, it can also turn out to be a mirage. The truth is that your tax and financial picture may become more, rather than less, complicated in retirement. With minimum distributions from tax-deferred accounts, pensions, and social security payments kicking in, you may end up in a higher tax bracket than you were in when you were working.

But, there are ways to minimize your exposure. With some research, planning, and expert advice, you can take steps before you retire to reduce your tax burden after retirement.

Here are two things to keep in mind as you begin to plan for retirement:

  • Tax-deferred savings plans are popular for a variety of reasons. However, when you start to tap those funds, you’ll realize that tax-deferred does not mean tax-exempt. First, you’ll need to pay taxes on distributions from these accounts. Second, the funds you withdraw will count as income on your tax returns. Depending on how much you withdraw – you may end up bumping yourself into a higher income tax bracket. This is all very important to keep track of, as you will have to start taking minimum distributions from these accounts at the age of 70½.
  • One step that you can take ahead of retirement to minimize this burden is to convert some of your tax-deferred investment accounts to ROTH IRAs. You’ll still pay income taxes on the amounts you convert, but withdrawals taken later will not be taxed and will not require minimum distributions.

Overall, your goal is to pay taxes on your investment funds when your tax rate is at its lowest. Moving, managing, and consolidating these funds at the right time is an important step to minimizing your tax bill during retirement. Doing this requires thoughtful planning and execution. Contact us to review your financial picture and formulate a plan to help secure your financial future through retirement.


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