One area of retirement planning that receives significant attention is accumulating enough savings to retire without the fear of running out of money later in life. However, an area that receives far less attention is the taxability of the savings as they are withdrawn. If they are fully taxable, the net income a pool of savings will produce is much less than anticipated, and can require a much larger pool of savings to account for the loss due to income taxes. Let’s look at ways to address this problem.
First, understand that funds invested in traditional IRAs, 401(k)s and other tax-deferred savings programs are fully income-taxable when withdrawn. So, if you only use these types of retirement savings plans, you may have as high a tax bill in retirement as you had when you worked. Make sure you plan accordingly.
Second, a more non-traditional but safer way to create tax-free income from taxable IRA accounts is a Fixed Index Universal Life contract. These contracts are quickly becoming an alternative to Roth IRA accounts for those 59 ½ years of age and older. IRA distributions are taken and then used to fund this contract resulting in:
a) Lower required minimum distributions
b) Income tax-free borrowing
c) Tax-free death benefit to the ones you love
d) Chronic illness accelerated benefits
Third, funds invested in Roth IRAs and Roth 401(k)s are taxed going in, so they come out tax-free. That may affect how much you can afford to save but also reduces the amount you have to accumulate, as there will be no loss to income taxes.
Fourth, savings invested after tax, in appreciating assets, are subject to future capital gains taxes but not income taxes generally (some dividends are taxed at normal rates but not all) as the money was already taxed. So, while not quite as favorable as tax-free, capital gains tax rates have traditionally been lower than applicable income tax rates, which is a plus.
My best suggestion is that you try to achieve a balance between the three types of savings so your income in retirement is a blend of income-taxable, tax-free and capital gains taxable funds. That way, your total tax burden in retirement should be quite a bit lower than it would otherwise be, hence reducing the need for much higher savings accumulations to compensate for tax erosion.
Lastly, search out a firm who has a minimum of 15 years of tested experience in the retirement space and that holds the designation as a fiduciary, which by law must put your best interest first.
Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Contact Frederic: 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.com
This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS.
