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How Tax Planning Changes Through Four Stages of Retirement Part I - The First Steps

How Tax Planning Changes Through Four Stages of Retirement Part I - The First Steps

| August 03, 2020
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Have you often thought about how taxes affect your retirement? Have you prepared yourself for tax planning changes through the states of retirement?

Let’s warm up to this topic with a little brain teaser about Bill. Sounds fun right?

Okay, so after working hard for his adult life, Bill, 65, has finally retired and he’s going to more concerts than ever before. 


Bill has $42,475 in taxable income which includes $25,000 of Social Security benefits this year. 

If you check the chart below, Bill’s $42,475 of taxable income puts him squarely in the 22% tax bracket because it’s more than $40,125 and less than $85,525.

Toward the end of the year, Bill decides to take an extra $1,000 out of his IRA for a trip to see Willie Nelson play in Austin. How much is he taxed on that extra $1,000?

So how much tax will Bill owe on the $1,000?

The logical answer, according to the chart, is that for every dollar of IRA money he pulls out, he pays $.22 in federal income taxes. Therefore, if he took out $1,000, he should owe $220 in federal income tax – 22% tax.

Simple enough, right?


He owes $407 in tax—a 40.7% federal tax rate on that income!

Thanks to the madness that is our tax code, and the unique formula that determines how your Social Security benefits are taxed, the real answer is that Bill owes $407 on that extra income.

Shocking, right? Almost to the point where it can’t possibly be true! I mean, if the top rate for a single person is 37%, and that rate doesn’t begin until he has more than $510,000 of taxable income, how can he pay a higher rate with much less income?

It doesn’t make any sense! But here’s the thing… It doesn’t have to. It is the tax code, after all.

In the following parts of this series, I’ll explain more about why Bill faces that tax bill, but for now, the important thing to realize is that when it comes to taxes, the “obvious” answer is not always the correct answer.

It is my hope that you'll be better informed about the challenges of retirement tax planning after reading this post.

You may be wondering, “Why is a financial advisor giving a presentation about retirement tax planning?"

From time to time, I present workshops and classes on various financial education topics such as:

  • Social Security
  • Retirement planning
  • IRA planning
  • Health care planning
  • Cyber-security
  • Late-stage college planning
  • And more!

My goal is always to inform and educate my audience so you can understand how critical financial planning topics affect you and your family.

I've seen many people make mistakes and pay more taxes in retirement than is necessary. 

When that happens? It makes my job harder because people have less income in retirement and we have to find ways to make their portfolios last.

Taxes can seem complex and jargon-filled, even though the underlying concepts are fairly straightforward.

There is one thing I definitely need to point out before we go further:


Everyone’s tax situation is different. You should always consult a qualified professional tax advisor to discuss your specific tax situation, especially about these topics:

  • Traditional IRAs (tax-deferred): You must pay taxes on distributions or conversions at ordinary federal and state rates.
  • Roth IRA (non-deductible): Money grows tax-free and earnings may be withdrawn tax-free in accordance with IRS rules. 
  • State taxes: This presentation references federal taxes. You may still face state taxes. Check with your tax professional.

I’m a [financial planner/investment advisor/advisor] and I DO NOT PROVIDE TAX ADVICE. What I do is help people understand how the tax code and other rules could impact their financial planning and investments, and then we develop a plan to take into account many of the odd things people encounter, especially around taxes in retirement.

Our goal here is to help you understand that the retirement distribution game – spending assets in retirement – is much different than the accumulation game when you’re saving for retirement.

Chances are you have been in the accumulation phase of your life for several decades and you’ve been working hard and trying to save money and hopefully your accounts have grown. 

But now, as you enter or prepare for retirement, you’re in an entirely different phase… The distribution phase. And the distribution phase has new, strange rules that can catch people off guard. And along with those new rules, there are often many changes in your own personal life that can have a big impact on your taxes, too.

For instance, your children are grown and that means no more child tax credits. Your house may be fully paid off and that means no more mortgage interest deduction. If you’ve already retired, you may no longer be receiving tax-free employer-paid medical insurance. If you’ve stopped working, you may no longer have the ability to stash income in a 401(k) or similar plan to manage your annual tax bill.

At some point, you’ll start taking Social Security. And sooner or later, when you reach 72, you’ll have to start taking required distributions from your retirement accounts.

The list of changes goes on. Many aspects of retirement will affect your tax bill in ways totally different from your working years. Understanding what these are, and how they can impact you, is absolutely crucial.

So that brings us to a simple statement about the problem we’re here tonight to discuss.

Simply put: People often pay more taxes in retirement than expected because a confusing system treats various income types differently and contains hidden taxes and penalties.

In the accumulation phase, people build their assets in several different forms – stocks, bonds, real estate, pensions, 401(k)s, IRAs, and more.

In the distribution phase, your regular wages stop coming in. You have to take the money you’ve saved and use it to fund your retirement, which can go on for decades with good health on your side.

That’s challenging because you’ll need to make informed decisions about the tax implications of tapping different accounts and it can be costly. In retirement, your tax rate can vary dramatically based on decisions you make, such as the timing and order in which you use different sources of money to pay for your expenses.

Poor choices through misunderstandings or ignorance of the rules can result in people paying more taxes than necessary. As a result, they may see their savings drop faster. And that can mean less to leave to the kids and the grand kids.

Of course, we don't want that to be you and the fact that you are here means to me that you are willing to work towards a solution, which is an important first step…

In the next part of the series we will discuss developing solutions and later on in the series...we will find out what happens to Bill!

If you have any questions, feel free to send me an email at! I’d love to hear from you!

Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.

The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation. Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance.

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