Tailor your taxes for retirement

Tailor
your taxes for retirement

Retirement
& Longevity

From
withdrawals to conversions, taxes in retirement can be a balancing act.

After a
fruitful career and plenty of practice paying taxes, you may feel prepared for
the tax man in retirement. But a review of your post-retirement taxable income
may yield some surprising insights. Examining your position can help you design
ways to optimize your current investment strategy. Taking a new look at both
fixed and flexible expenses provides the opportunity to ask questions and have
discussions with your financial advisor about the tax implications of your
total portfolio. When it comes to taxation, the more thorough the examination,
the better.

Solopreneur?
Take deductions

If you’re
still working as a solopreneur, you can actually deduct Medicare Part B and D
premiums – even if you don’t itemize. Supplemental Medicare and Medicare
Advantage costs are also deductible. But not everyone can deduct – this only
applies if you don’t have access to a health plan for your business or through
your spouse’s employer or business.

Taxes on
Social Security income

Despite any
widespread myths to the contrary, Social Security is taxable
income. You could pay tax on up to 85% of your Social Security income under
certain circumstances, so beware of your filing status and annual income. For
example, if you file a return as an individual and your adjusted gross income
plus nontaxable interest, in addition to half of your Social Security income,
is more than $34,000, you’ll pay tax on up to 85% of that benefit. Adjusted
gross income covers everything, from wages (if you are still working) to rental
income and, most importantly, any withdrawals from 401(k)s and IRAs. However,
Roth IRAs are exempt.

Offsetting
required minimum distributions

Depending on
your portfolio, required minimum distributions (RMDs) can bump you into a
higher tax bracket than you were expecting. It’s important to take RMDs into
consideration every year and factor in what you’ll be required to take out of
your retirement accounts starting at 72 (or earlier if your plan allows). One
way to balance an increased tax burden is with a qualified charitable
distribution (QCD). After 70 1/2, you can donate up to $108,000 a year to an
eligible charity directly from your traditional IRA – and you won’t have to pay
any taxes on it. QCDs can also be a way to meet your RMD, with the caveat that
you can’t then itemize the donation as a charitable deduction on your return.

To
convert or not to convert

If you’ve
got retirement funds in traditional IRAs or 401(k)s, you have the option to
convert these to a Roth at any time. This strategy could potentially lower
future taxes – but you’ll have to pay taxes in the year you convert. Look at
current tax rates and potential future income from your assets and talk to your
advisor and tax professional to forecast whether Roth conversions would make
sense for you.

The right
amount of withdrawals

Conventional
wisdom says to follow the “4% rule” – withdrawing no more than that amount of
your retirement portfolio every year. But this is only a general guidance – and
deserves to be revisited, especially when there are market waves, inflation or
other headwinds. Be sure to set up a time to renew and adjust your withdrawals
as needed to manage your income bracket most effectively.

Tax
implications can be overlooked too often when the focus has been on saving and
investing for so many years. Whether you are pre-retirement or post-retirement,
there’s always an opportunity to review – and adjust.

Kent Pendleton, AAMS®

Financial Advisor, RJFS

Pendle Hill Advisors LLC

14375 Liberty St, Ste 109 | Montgomery,
TX 77356

T 936-297-8267

Kent.Pendleton@raymondjames.com | www.raymondjames.com/pendlehilladvisors

Material
created by Raymond James for use by its advisors. Securities offered
through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment
advisory services are offered through Raymond James Financial Services
Advisors, Inc. Pendle Hill Advisors is not registered broker dealers and is
independent of Raymond James Financial Services.

Sources:
thebalance.com; westernsouthern.com; moneywise.org; wealthenhancement.com;
ssa.gov

Raymond
James does not provide tax services. Please discuss these matters with the
appropriate professional.

If certain
conditions are met, ROTH IRA and ROTH 401(k) distributions will be completely
income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to
required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January
1, 2020). Investors should consult a tax advisor before deciding to do a
conversion.

Withdrawals
which exceed income will reduce the value of your portfolio.