It’s that time of year where taxes are top-of-mind for all Americans. While April 17 is an important deadline and many are familiar with the steps involved for tax preparation and filing, what steps are being taken to reduce your tax burden the other 364 days each year?
Many retirees are shocked to discover that the impact of income taxes on their retirement could be significant. While W2 wages may come to a stop, Social Security will likely be at least partially taxable and withdrawals taken from tax-deferred retirement accounts can quickly add up. Especially once reaching the age of 70.5, when required minimum distributions will continue to increase each year forcing you to take taxable income, possibly even pushing you into a new, higher tax bracket.
You have likely heard about the importance of diversification and asset allocation as investment fundamentals. In retirement, asset location and tax diversification can be equally significant factors. There are a number of different account types or “locations” ranging from taxable, tax-deferred and tax-free to choose from, along with investment vehicles with tax-advantaged benefits. By diversifying your investments into a variety of accounts based on tax-status, you can begin to control and mitigate when taxable events will occur to be in your favor based on current circumstances and tax laws.
Retirement planning is a distinct specialty that requires expertise to create a comprehensive strategy for where, how and when to take money from your savings for income. The bottom line, a retirement plan with no tax plan may be one of the most significant and irreversible mistakes you can make. After all, you may recoup losses with investments in the market. The same is not true for costly tax-planning mistakes.
Have retirement questions you’d like to see answered in future columns? Email Info@CRARetire.com.
Christian Cordoba, CFP®, RFC®, CFS, is a CERTIFIED FINANCIAL PLANNERTM, Master Elite IRA Advisor and founder of California Retirement Advisors.