Tax Aware Retirement
The Retirement Plan Mirage
You are well into your career or your work-life by now, but have you noticed something? Your thoughts have gone from ‘I have time to worry about that (money) later’ to ‘when did I turn 40? I need to get caught up!’
When you think back to your college years in the 1990s and early 2000’s, do you find it odd that the same strategy that you were told to focus on for retirement is still the same strategy and plan that everyone is talking about today – the 401(k) plan?
You begin to realize very quickly that your 401K plan reminds you of the days of the car bag-phone or worse yet, calling cards for payphones!
Evolving In The Information Age
It has been 20-some years since you started your work-life, everything around you has changed, you have a smartphone, a smartwatch, and maybe even a smart car.
So why haven’t your retirement option(s) changed to become smart as well?
The list of retirement plan choices we have available to us at work is pretty much the same as it was 20 years ago: 401K, 403B, Pension Plan, IRA, Roth IRA, SEP-IRA/SIMPLE IRA….
By this point, your mind is probably doing what so many other people’s minds do on a consistent basis.
‘I guess it must be the right thing for me to do or my employer wouldn’t be offering it to all of us, right?’
An Impaired Driver
You don’t have time to think or worry about your financial future and retirement. Work is stressful and demanding enough but for people who have kids (you may even be playing a full or partial role in raising your grandkids), life has too many moving parts to take this thought any further – and that is when it happens.
This is the point where the opportunity to sit in the ‘driver’s seat’ of your financial future is handed over to an ‘impaired-driver’.
The ‘impaired-driver’ you ask? Think of this make-believe person as the organization managing your retirement and financial future, confidently telling millions of Americans how to save for retirement yet having NO IDEA what their personal situation looks like now, or in the future.
A generalized cookie-cutter “retirement plan” that works for most.
YOU CAN CHOOSE HOW MUCH YOU WILL PAY IN TAXES – YES, YOU CAN
The Harvest Should Be Plenty – It’s Up to You!
Do you know any farmers?
Think of your tax requirement as a wheat seed that a farmer will plant in their field. One wheat seed will typically produce around an average of 110 seeds. Now if you were the farmer would you want to pay taxes on the 1 wheat seed that you plant or on the 110 wheat seeds that you reap at harvest?
You would want to pay the taxes on the 1 wheat seed that you plant and get all of the wheat that you harvest, TAX-FREE!
That’s how it works in tax-aware retirement.
Required Vs Optional Tax
So now picture yourself withdrawing income in retirement from tax-free and tax-advantaged accounts. What OTHER advantages will that give you for being SMART™ (Strategic Movement Around Retirement Taxation™) when you designed your retirement plan to be tax-aware?
If you are withdrawing income in retirement from tax-free or tax-advantaged accounts, it’s likely you will have the opportunity to not be ‘required’ to pay taxes on your Social Security – unlike most Americans. You see when it comes to taxation there are ‘required’ taxes and there are ‘optional’ taxes.
The farmer who pays tax on their wheat seed prior to planting is paying ‘required’ taxes. The farmer who defers the tax on their wheat seed prior to planting is paying ‘optional’ taxes on the wheat harvest.
Social Security tax is also an ‘optional’ tax that you would like to avoid paying and would legally be able to do so as long as you planned ahead. Part of becoming tax-aware is to become aware of the ‘hidden taxes’ that you are not counting on paying – like taxes on Social Security, a tax that would likely cripple you financially in retirement if you did not plan for it.
Imagine paying 20-40% tax on your Social Security income.
What effect will that have on your retirement income?
And don’t forget: It is not just 20-40%* lower Social Security income. You will also pay tax on the taxable income you withdrawal from your 401K or similar accounts.
*20-40% is just a range, no one knows how high the tax rates will go in the future but based on the past history of income taxes in this country, the size and growth of the National Debt, the growing cost of Medicare and the number of Baby Boomers on it and increasing, the Social Security shortfall and our many social welfare programs in our Country the increases are scheduled to start out at 2017 levels but will likely continue upward for who knows how long.
Not All Taxes are Required
Now in FULL DISCLOSURE – I am not now, nor would I ever condone you NOT pay taxes. However, there are two types of taxes that I categorize: Optional and Required taxes, and I know which ones I want to pay. We live in a society where we have many freedoms.
And freedoms don’t come without a cost.
We also have people who cannot take care of themselves for a variety of reasons (the reasons do not matter and very likely you know people who fall into this category that you deeply care about, but you have neither the time nor the expertise to be able to provide that care for them yourself).
So we have social welfare programs.
Our freedoms, our governmental programs, the Military, Social Security, Medicare, service to the National Debt, and on and on cost money. The government makes money in a few ways but the most common is through taxation.
It’s Easy to Have a Tailored Retirement Plan
Since Safe Money Partners focuses on REQUIRED taxes, we analyze what you are doing now as well as what you have done in the past with your retirement planning.
Our analysis will help determine what you can accomplish today and what you can do moving forward to place yourself in the best position to maximize the amount of income that falls into the REQUIRED category. And most importantly how to redistribute as much of the monies you have been labeling in the OPTIONAL category.
Check out our frequently asked questions area about tax-aware retirement.
Tax-Deferred: This refers to monies that are invested without taxes being withheld so that when monies are withdrawn from the account later, any money that is withdrawn is subject to the current income tax rates at the time of the withdrawal. Accounts like this would include: 401K, 403B, and Deferred Annuities
Taxable: This refers to accounts in which monies that are deposited are already taxed but the growth on the account is tax-deferred until they are withdrawn from the account. Accounts such as this can have an advantage at the death of the owner because they receive a step-up in basis. These accounts include non-qualified brokerage accounts, bank accounts, CDs, and money markets.
Tax-Free: This refers to accounts in which monies are deposited that have already been taxed and when future withdrawals are taken, the monies are all tax-free including the interest you earned. Accounts like this would include Roth IRA, Municipal Bonds, and Cash Value Life Insurance.
Safe Money Partners Can Help You
Safe Money Partners offers financial planning retirement planning services including:
- Fee-Only Divorce Financial Analysis – If you are contemplating divorce/separation, are in the divorce process or already divorced you deserve the opportunity to work with someone who has studied what the rights, benefits, and entitlements are of someone in your situation. Let’s discuss what is important to you related to life after divorce and what planning looks like for you to still achieve your financial goals. (Divorce Financial Planning by SMP Strategies, LLC)
- Tax-Aware Retirement Insight – Are you compounding your retirement monies or are you compounding your future tax liability? Do you want to focus on a future that has taxable income or tax-exempt income? An analysis of your savings buckets can help you better understand if you have more allocation going to the tax-deferred ‘bucket’ rather than the tax-free ‘bucket’ for your retirement.
- Roth IRA Conversions – If you believe taxes are going to go up in the future you may be one of the many people in American that want to better understand how you might be able to convert your Qualified monies to a Roth IRA.
- Social Security Maximization – Many people are still not aware that their Social Security may be subject to taxation during retirement. A provisional income analysis will provide more insight for you.
- Estate Planning – (Services offered through Joseph Downing Law an Ohio Law Firm)– Are you in need of POAs, Wills, Trusts, or Planned Giving. Joseph Downing Law offers comprehensive Estate Planning from the basics (POAs and Wills to many types of Trusts) to help you decide what your legacy will be when you are no longer with us.
Tax-Aware Retirement Planning
It’s time to make your plan today and learn about how tax-aware retirement is within reach for you and your family. At Safe Money Partners, we have the experience you need to help guide you on your journey to a tax-efficient, SMART retirement. Schedule your free consultation with us today, and let’s start making a plan for your retirement one step at a time.