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Retirement Tax Planning

Retirement Tax Planning

Retirement tax planning can have a significant impact on your financial outcome

Strategic Income Planning

Being deliberate about your income, investment vehicles, and retirement tax planning now could have a material effect on your wealth during your retirement years. It can also impact the legacy you leave to your loved ones when you die. In fact, beginning your retirement tax planning years in advance will give you the best chance of realizing long-term tax savings.

When you reach your retirement years, you have an element of control over your income that most people in their working years don’t have. By taking a strategic approach to when you withdraw funds from your retirement accounts, how much you withdraw, and where the withdrawals come from, you may be able to maximize your wealth and lower your overall tax obligations.

Some retirees intentionally refrain from making withdrawals from tax-deferred retirement accounts until absolutely necessary. The goal for most people with this type of retirement tax planning is to shift their income to the years when they would otherwise have a lower tax liability, rather than drawing on tax-deferred retirement accounts when in a higher tax bracket.

  • Tax-sensitive asset location
  • Deferring gain recognition
  • Tax bracket management
  • Roth IRA conversions
  • Managing contributions to traditional or Roth IRAs
  • Gain and Loss harvesting
  • Tax-sensitive management of the retirement portfolio

Under the Tax Cuts and Jobs Act of 2018, tax brackets are broad. 

There may be an opportunities to “fill up” your current tax bracket by adding retirement income without moving to a higher marginal tax bracket. For retirees with a significant amount of tax deductions in a given year, it may be smart to increase retirement plan distributions for that year to take full advantage of all available deductions. And, pre-retirees and early retirees should both take advantage of years when income is lower to prepare for the increase in taxable income brought on by both Social Security and required minimum distributions (RMD's).

These retirement tax planning strategies look different for everyone. Ultimately, it often comes down to evaluating all available options and striking the right balance between paying more taxes now or potentially paying higher tax rates and ultimately even more taxes in the future.

Retirement Tax Planning Strategies for Social Security

Many retirees automatically assume they should start taking Social Security the moment they reach full retirement age. However, that may not be the most advantageous from a tax planning point of view. Delaying the date you begin drawing benefits may provide for a greater benefit over time. For other retirees, it is smarter to actually claim Social Security benefits at an earlier date.

These decisions depend on a number of factors. If you have not already begun drawing Social Security benefits, talk to your financial professional about your options. Your wealth advisor can help you evaluate Social Security retirement income planning strategies, so you can make more informed decisions.

Roth IRA Conversions

Another retirement tax planning strategy investors should evaluate is whether it makes financial sense to convert part or all of a traditional IRA to a Roth IRA. Looking at some of the features of both traditional IRAs and Roth IRAs helps explain why this is a good option for some people.

Traditional IRA Contributions

When you contribute to a traditional IRA, you may get a tax deduction for your contributions. Your account balance then grows tax-deferred until you’re ready to take distributions, or until age 72, when you are required to begin taking RMD's. When you take a distribution, you are generally taxed at ordinary income tax rates on the entire amount withdrawn.

Roth IRA Contributions

When you contribute to a Roth IRA, there is no tax deduction for your contribution. Similar to traditional IRAs, you also don’t pay taxes on the growth of your investments if the account’s value increases over the years. Unlike traditional IRA distributions, all qualified distributions of the initial contribution and the subsequent growth from Roth IRAs are income tax-free! For any distribution to be considered qualified, the contribution must have been in the account for at least five years. Distributions of the contribution growth incur an early distribution penalty if the owner has not reached the age of 59 1/2. There are, however, a few exceptions to this rule.

Asset Location

When you are evaluating potential retirement tax planning solutions, don’t overlook the importance of asset location (not to be confused with asset allocation.) Simply put, asset location refers to making careful decisions about where (in what types of accounts) you hold different types of investments. That's important because different types of investments, such as municipal bonds, growth stocks, and real estate investments, come with different tax implications. And, different types of investment vehicles are taxed differently too. Ideally, the most tax-efficient investments should be held in the least tax-efficient vehicle.

Asset location, when effective, can positively impact the tax efficiency of your overall investment portfolio. A skilled wealth advisor will look at each element of your portfolio and help you structure investments in a way that is designed to give you the most favorable tax treatment in your retirement years.

Investment Vehicles

While tax efficiency is an important component of your retirement income planning, remember to also factor in investment gains and expenses when making decisions about what types of investment vehicles to buy, or what types of assets to invest in. An otherwise-tax efficient investment may not make sense if it comes with fees and expenses that negate the tax benefits.

Unfortunately, many retirees own annuities or other products that were sold on the basis of an attractive tax-deferred potential growth. The reality is that some insurance and investment products come with exorbitant fees — fees that can quickly negate half or more of the expected gains. To add insult to injury, annuity gains distributions are generally taxed as ordinary income at the investors' highest marginal tax rate.

That’s not to say you should never invest in an annuity. But, you should always understand the potential implications and expenses associated with different types of investments and investment vehicles. An ideal retirement portfolio typically consists of a diversified mix of tax-deferred, tax-free, and taxable investments, and a variety of vehicles. Optimizing retirement wealth means considering each element of your portfolio individually and as part of the whole when tax planning for retirement.

About Us

At South Florida's Finley Wealth Advisors, we prioritize trust and transparency in managing your wealth. As Independent Fee-Only Fiduciaries, our advice aligns solely with your interests.


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Financial Disclaimer: Finley Wealth Management, LLC is a Registered Investment Advisor with the State of Florida. All expressions of opinion are subject to change. All the information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Diversification does not eliminate the risk of market loss. There is no guarantee investing strategies will be successful. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.