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Three Stages of Tax Planning in Retirement

For many people, you never have more control over your tax situation than in your retirement. Great tax planning in retirement can save you $10,000s per year, and $100,000s over your lifetime. At Straight Path, we’ve developed our own proprietary way of visualizing tax planning in retirement. We view taxes in retirement in three distinct stages. Each of these stages has its own priorities, goals, and specific strategies that need to be enacted in the different periods of your life. 

Stage 1: Pre-65 Years Old (Before you reach Medicare)

The first stage of tax planning inside retirement is pre-65 years old. If you are planning on retiring before age 65 we need to do some special planning and have specific strategies for that period. One of the important considerations is that until age 65 you do not qualify for Medicare. So if you do not receive any employer health insurance or employer retirement health insurance, we have to go to the individual marketplace. Going to the marketplace provides both opportunities and costs that we need to be aware of. If we can keep taxable income low, we may be able to qualify you for subsidies and help offset health insurance premiums than what they otherwise would have been without good tax planning. In fact, for many retirees who are retiring before age 65, correct tax planning for this first stage can be the most impactful, most beneficial, and save you the most money compared to any other period of your retirement. 

Stage 2: 65-72 Years Old

The second stage of tax planning covers from age 65 up until age 72. During this period, we have the most flexibility. During this time period, the IRS does not require you to do anything with your accounts and we no longer have to worry about qualifying for health insurance subsidies. The primary concern for most retirees during this stage is keeping income below Medicare surcharge thresholds to avoid hidden taxes. The thresholds and levels of income we watch for in this stage are much higher than what the thresholds are in stage one. During this time period, we may look to do targeted Roth Conversions or recognize capital gains.

Stage 3: 73 Years Old & Beyond (for some this is 75 and beyond)

The third stage of tax planning begins at age 73 years old. The reason why age 73 starts this period of retirement income planning is because that’s the age, with recent tax law changes, that we have to start taking Required Minimum Distributions (RMDs). RMDs are when the IRS requires you to take a certain amount of money out of your IRAs and 401(k)s each year. This has an impact because it forces the recognition of taxable income each year. While we may not have a lot of planning opportunities left in stage three, it’s important to keep an eye on stage three even while going through stages one and two.

Additionally, during this stage, we can take advantage of a new opportunity in the tax code called “Qualified Charitable Distributions.” QCDs allow you to donate money directly from your IRA to charity, potentially satisfying all or part of your required minimum distribution, while not having to report the QCD as taxable income on tax return. This is great for nearly all retirees as it lowers your Adjusted Gross Income, but it is especially beneficial to those who do not itemize and thereby get no tax advantage from traditional charitable contributions.

The Big Picture

Many times a lot of tax preparers, CPAs, and financial planners will focus on lowering your tax burden this year or next year. However, they are not engaging in the necessary planning to anticipate what may occur in the next one or two stages of retirement.  .Having a plan that takes into account the big picture, across the entirety of your retirement years and stages is critical to saving you as much taxes as possible. 

If you feel that your current financial planner isn't adequately addressing these stages, it might be worthwhile to consult with a team of financial planners who specialize in tax planning and expertise in this area. 

To delve further into discussing your current stage of retirement planning and exploring the various strategies within each period of retirement tax planning, please don't hesitate to contact our team today. We're eager to connect with you and address any remaining questions you may have.


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