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Importance of Implementing Tax Reduction Strategies:
Helping Retirees Grow Income

Patrick Seaman  |  May 26, 2020

Managing taxes in retirement can often be complex and challenging for many people. However, with Seaman Retirement Planning, you can thoughtfully plan for the future and help reduce the tax burden while increasing earnings for you and your heirs. Reducing taxes plays an integral part in preserving any retirement plan. Tax laws can be tricky and confusing. Even little mistakes can lead to serious tax problems. Millions of individuals overpay in taxes each year without even realizing it, and this can lead to a considerably lower retirement income. By formulating and devising a tax-efficient investment strategy, retirees can keep more of their hard-earned income and assets for themselves, as well as their heirs.

If you are like most people, you saved money for a long time in a 401(k) plan or IRA (qualified account) and plan with the intent of using it when you retire to supplement your income and live your desired lifestyle. Those years of savings are defined as the Asset Accumulation Phase of retirement planning. When you retire, you transition into the Income Distribution and Asset Preservation Phase. During this transition, it is key for you to have a plan that lets you use your assets for income without ever worrying about running out of money during your lifetime.

The money you saved in your 401(k) or IRA (qualified account) was most likely excluded from taxable income – such contributions are sometimes referred to as “pre-tax” dollars. These contributions then grew tax-deferred over time. You pay income taxes on this account when you make withdrawals – typically during retirement when you might expect to be in a lower tax bracket. It is this subsequent federal income tax liability on the distributions that should be considered when evaluating tax strategies for a future retirement.

Will taxes be lower in the future?
Predicting taxes in retirement can be difficult and planning for future taxes is often complicated. For example, there is always some level of uncertainty around tax reform debates, public policy, and income tax. Projected increases in the national debt, slower growth in the labor force paying taxes, projected shortfalls in Social Security and Medicare all lead to potential tax increases or changes to benefits paid by the Federal Government.

While conventional wisdom suggests that your income will decline in retirement and your tax rate should be lower, that may not be the case. To help reduce your taxes during retirement, you should consider taking action today. You may have to take on a greater income tax bill today, but by strategically repositioning your assets you may save significantly on your tax bill over the long term.

Tax Diversification
If all of your assets are in your 401(k) or IRA (qualified plans), you may have a significant tax liability on distributions when you retire. Tax diversification is the strategy of spreading your assets across a mix of taxable, tax-deferred and tax-free accounts.

By strategizing fund placement and being more aware of taxable accounts, tax-deferred accounts, or tax-free accounts, retirees can make the most of the protection offered by the account to effectively shield their most significant tax-generating investments and grow their income.

Roth IRA Conversion
One approach for achieving “Tax Diversification” is converting your traditional IRA and qualified plan assets into a Roth IRA. Conversions are considered distributions for tax purposes, so you’ll have to pay income taxes on the amount converted in the year of conversion. However, once converted, the money will grow tax-free. Since distributions count towards your tax bracket, it’s important to have a strategy in place that allows you to leverage the tax-free growth of a Roth IRA without bumping you into a higher tax bracket. This strategy should also take into consideration annual limits for conversions to avoid unnecessary penalties or taxes.

Making the Most of Tax Brackets
Another strategy for retirees is to draw income from various tax sources as they transition gradually from lower to higher tax brackets. This means drawing enough income from tax-deferred sources like 401(k)s and traditional IRAs to reach the limit of the current income tax bracket. This approach has been incredibly helpful as it maximizes the use of the relatively low federal tax rates for standard income.

It’s important to work with an experienced financial professional and your tax advisor to help you develop and implement a tax strategy for retirement that is appropriate for your financial situation. A sound tax strategy is crucial for effectively and legally reducing tax liability and maximizing retirement income. Leveraging a combination of advanced and core strategies, advisors at Seaman Retirement Planning can help retirees develop a plan that links inflation protection with tax-efficient and sustainable withdrawals.

About Seaman Retirement Planning Seaman Retirement Planning is a full-service financial planning firm committed to helping and guiding people to pursue and meet their financial goals. The firm helps people navigate the complexities and nuances related to all facets of the financial planning process, such as investments, taxes, insurance, estate, and retirement. Investment advisory and financial planning services are offered through AlphaStar Capital Management LLC, a SEC registered investment adviser. Seaman Retirement Planning and AlphaStar are separate and independent entities.

Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. AlphaStar Capital Management, LLC and Seaman Retirement Planning are independent entities.

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