How to Plan for Taxes in Retirement

Transcript

Hi, I’m Brent with Scottsdale Wealth Advisory. You’ve spent decades saving for retirement. You did the hard part by setting money aside, staying invested, and making smart decisions. But now there’s another challenge: how do you keep more of that money from going to taxes? 

Because the truth is, retirement doesn’t mean you stop paying taxes. It just means the rules change. And if you don’t have a strategy, you could end up paying more than you need to. Let’s talk about how to avoid that. When we help clients build a retirement plan, taxes are a big part of that conversation.

The 3 Retirement Tax Issues That Often Drive Higher Tax Bills

There are three key areas where poor tax planning can cost you year after year.

1. Required Minimum Distributions (RMDs): Age 73 Withdrawals and Tax Bracket Impact

First up is required minimum distributions, otherwise known as RMDs. Once you turn age 73, the IRS forces you to withdraw money from your traditional retirement accounts. Whether you need that income or not, that’s called an RMD. And those withdrawals are taxed as ordinary income. 

If you don’t plan for it, RMDs can push you into a higher tax bracket, affecting your Medicare premiums, and even making more of your Social Security taxable. That’s why it’s smart to look ahead, sometimes years in advance, and build a strategy that minimizes the impact.

2. Social Security Taxation: When Up to 85% of Benefits Can Be Taxed

The second area to think about is Social Security taxation. A lot of people are surprised to learn that up to 85% of your Social Security benefits can be taxed, depending on your total income. That includes things like IRA withdrawals, investment income, and even part-time work. With the right planning, we can structure your withdrawals to keep more of your Social Security tax-free.

3. Withdrawal Strategy in Retirement: IRA vs. Brokerage vs. Roth Account Order

The third area that impacts taxes in retirement is something most people never think about: the order you withdraw from your accounts. Should you pull from your IRA first, your brokerage account, or your Roth? There’s no one-size-fits-all answer, but the right order can help reduce taxes over time and make your money last longer. 

For example, in some cases, we may draw from taxable accounts first and save Roth IRAs for later so you get more long-term tax-free growth. And in other cases, Roth conversions might make sense early in retirement to smooth out your tax burden before RMDs begin.

Annuities in Retirement Planning: Tax-Deferred Growth and Predictable Income

Now, where do annuities fit into all of this? Certain annuities can provide tax-deferred growth, and depending on how they’re structured, they may offer predictable income that complements your other taxable and non-taxable sources. In short, they can be used as a planning tool, not just an investment product.

Retirement Taxes Takeaway: “It’s Not What You Earn, It’s What You Keep.”

I tell people all the time, it’s not just what you earn or save, it’s what you keep. Taxes in retirement are complicated, but with smart planning, you can take control. 

If you’re not sure whether your current plan is tax-efficient, or if you’d like a second opinion on your withdrawal strategy, I’m happy to talk through this with you. Thanks for watching, and I’ll see you in the next video.