Many retirees face the challenge of navigating complex tax laws and regulations, often resulting in higher taxes than anticipated. Missteps in tax planning can chip away at your savings, leaving you less income to enjoy during your golden years.

By understanding how taxes affect your retirement accounts and investments, you can make informed decisions that can significantly impact your retirement income.

At Bulman Wealth Group, we are a dedicated financial planning firm in Roseville. We’re committed to guiding individuals and families through the intricacies of retirement planning. Our team has decades of experience incorporating tax-efficient strategies into personalized financial plans for our clients.

This blog post is your essential guide to charting a tax-efficient course in your retirement journey. It highlights several tax planning considerations, tax-advantaged account options, optimizing distributions, and taxable investment decisions.

The Importance of Tax Planning

Stock market volatility and investment strategies are common concerns that need regular attention. Unlike market fluctuations, tax implications are usually more predictable and manageable, so they also deserve consistent focus. Key points to consider:

• Tax brackets: Different types of income are taxed at different rates. Knowing your tax bracket can help you make smart decisions to maintain or lower your tax rate. This involves managing your income from wages, social security, pensions, and investment income to avoid moving into a higher tax bracket.

• Capital gains vs. ordinary income: Long-term capital gains are usually taxed lower than ordinary income. Holding investments for over 12 months qualifies them for these favorable rates. Qualified dividends are taxed similarly to long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. Knowing what kind of dividends you’re receiving can help you plan accordingly.

• Timing and tax year: Strategically planning withdrawals and timing investment sales can potentially reduce your tax burden within a given tax year.

• Taxable, tax-deferred, and tax-free accounts: Understanding the differences between these accounts help you plan more effectively. Taxable accounts require you to pay taxes on earnings annually. Tax-deferred accounts allow you to defer taxes until withdrawal. Tax-free accounts, like Roth IRAs, let your earnings grow tax-free, with no taxes due upon withdrawal.

Exploring Tax-Advantaged Account Options

Leveraging tax-advantaged accounts effectively helps you minimize taxes and maximize your retirement savings.

Traditional IRAs: Contributions to traditional IRAs can be tax-deductible depending on income level and participation in an employer-sponsored retirement plan. When you retire or leave your job, you can roll over funds from an employer-sponsored plan into a traditional IRA, continuing the tax-deferred growth. Withdrawals during retirement are taxed as regular income.

Employer-sponsored plans: Contributions to a 401(k) or 403(b) are made pre-tax, which can reduce your taxable income now. The growth within these accounts is tax-deferred, but withdrawals are taxed later as ordinary income during retirement.

Self-employed retirement plans: If you’re self-employed, you can take advantage of plans like SEP IRAs, SIMPLE IRAs, and Solo 401(k)s. These plans have higher contribution limits and offer similar tax benefits. Your contributions are tax-deductible, and the growth is tax-deferred until you withdraw.

Roth IRAs: Contributions to Roth IRAs are made with after-tax dollars, so there’s no immediate tax break. When you make qualified withdrawals in retirement, both contributions and earnings are tax-free. This offers significant long-term tax benefits, especially if you expect a higher tax bracket during retirement.

Roth conversions: This process involves moving funds from a traditional IRA or employer-sponsored plan into a Roth IRA. Although you’ll pay taxes in the year of the conversion, it allows for tax-free withdrawals during retirement.

Roth conversions can be complicated, with many factors to consider. Please consult with a Bulman financial advisor before converting your plan to a Roth IRA, we can help you navigate this process more smoothly.

Optimizing Retirement Account Distributions

Once you reach the required age, the IRS mandates that you take Required Minimum Distributions (RMDs) from your traditional IRAs and 401(k)s. These withdrawals are subject to income tax, and failing to take them can result in hefty penalties.

The IRS Uniform Lifetime Table and your current age determine the RMD percentage. For those reaching age 73 after 2023, the initial rate will be lower than for those who turned 72 before then. The specific RMD percentage increases each year to reflect your changing life expectancy. There are tax strategies you can employ to potentially minimize their effect.

Roth conversions: Roth IRAs do not require RMDs during the account holder’s lifetime, allowing your investments to grow tax-free for longer. While this triggers a tax event in the year of conversion, it can significantly reduce future RMD obligations.

Gifting income: Another strategy is gifting income to family members or charitable organizations. Gifting to family members reduces your taxable estate but does not lower your taxable income or RMDs. However, qualified charitable distributions (QCDs) from your IRA to a charity can reduce your taxable income and count toward your RMDs.

Using RMDs as income: Coordinating RMDs with other income sources can prevent large taxable income spikes, provide a steady cash flow, and help manage tax liabilities.

Planning these strategies before reaching the RMD age helps you take advantage of tax-saving opportunities and can give you a more efficient distribution strategy in retirement.

Investment Decisions in Taxable Accounts

How you structure your investment portfolio in your taxable account can substantially impact your tax liability before and after retirement. Here are some key considerations:

• Asset location: Placing various investments in tax-advantaged accounts can increase tax efficiency. For instance, placing investments that generate qualified dividends, taxed at lower rates, in taxable accounts can be beneficial. Investments generating non-qualified dividends, taxed as ordinary income, may be better suited for tax-deferred accounts.
• Tax-loss harvesting: This strategy involves selling investments at a loss to offset portfolio gains.
• Tax-smart rebalancing: Regularly rebalancing your portfolio tax-efficiently can help maintain your desired asset allocation without incurring unnecessary taxes.
• Tax-efficient investments: Consider incorporating investments designed to minimize your tax exposure. For example, municipal bonds are often exempt from federal and sometimes state taxes, offering a tax-efficient way to generate income.
• Tax-smart withdrawals: Strategically plan your withdrawals from different accounts, such as withdrawing from taxable accounts first to allow tax-deferred accounts to continue growing.

A financial advisor with a fiduciary duty at Bulman can assist you in optimizing your investment strategy to minimize taxes, aiming to help you keep more of your money invested and working for you.

Your Roseville Wealth Management Partner – Bulman Wealth Group

Navigating the intricacies of tax considerations in retirement can be challenging, but you don’t have to do it alone. 

Bulman Wealth Group serves clients throughout Northern and Southern California, and we provide comprehensive wealth management strategies tailored to your unique needs. Our services include:

• Personalized retirement planning: We create customized retirement plans that consider your financial goals, risk tolerance, and time horizon.
• Tax-efficient strategies: Our advisors identify tax-saving opportunities and implement strategies aimed at helping you retain more of your retirement income.
• Investment management: We offer professional portfolio management designed to align with your retirement goals and optimize tax efficiency.

Contact us today to see how we can help you plan for your dream retirement.