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What to Know About Taxes in Retirement

It’s been said that death and taxes are the only certainties in life. Taxes are inevitable whether you’re still working or not, which is why it’s so important to consider taxes in your financial plan before you reach retirement. Let’s explore what some financial professionals have to say about taxes in retirement.

Consider the State of Your Retirement

According to attorney and small business advocate Barbara Weltman, “One of the best strategies for saving taxes on retirement income is to live in or move to a state that is tax-friendly.”1 There are several states that have no income tax, including Alaska, Florida, and Nevada. While some may not want to relocate, it may be a wise consideration if you are looking to save on taxes on your retirement income.

Rethink Your Withdrawal Strategy

It’s no surprise that you want to make your money last in retirement. In part one of this blog, we discussed the difference between tax-deferred and after-tax accounts. “Fidelity® suggests you consider withdrawing no more than 4-5% from your savings in the first year of retirement, and then increase that first year’s dollar amount annually by the inflation rate.”2 It also says that “traditionally, many advisors have suggested withdrawing first from taxable accounts, then tax deferred accounts, and finally Roth accounts where withdrawals are tax free.”2 While the strategy may work for some, remember that you should determine a withdrawal strategy that works best for you with the help of a financial professional.

To Accelerate or Defer?

Determining which distribution strategy works best for you is another important consideration. According to senior tax accountant William Perez, you maycan “avoid potentially paying more taxes in a future year if you take more sizeable withdrawals now, when you have a zero or a low tax rate.”3 Another option would be to defer distributions, in which case you would wait in hopes of “keeping your taxable distributions to minimum.”3

The good news is that you have options when it comes to tax planning in retirement. Before making important decisions, consider speaking with a financial professional who can offer sound advice. They can help you decide what the best course of action could be for your situation and offer options you may not have considered. Remember that you are in control of your financial future and you don’t have to make important decisions on your own.