Retirement & Tax Strategies for Income Protection

Retirement tax planning can help prevent taxes from chewing up retirement savings. Consider these retirement tax planning strategies, including required minimum distributions, to help protect your retirement income. strategy: Protect the nest egg with income strategies
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Key Takeaways

  • Create a retirement withdrawal strategy to minimize taxes

  • Understand all the ways to stretch your retirement income

Retirement is full of possibilities. Will you travel? Pursue a new career or hobby? Volunteer in your community? Spend more time with friends and family?

No matter your vision, you need a plan to help ensure you have sufficient income to enjoy this chapter of your life. It’s possible your savings may need to last 30 years or more. According to the Social Security Administration, 1 out of 4 people age 65 today will live past age 90.

So what can you do now to help protect your retirement income? Look for ways to keep more of your money working for you.

Streamline Your Tax Bill

Taxes play a critical role in our society, providing a variety of public services. But no one wants to pay more than they have to. Here are a couple of tips that might help you lower your federal income taxes.

Create a tax triangle. A common misconception is that your tax bracket will be lower in retirement. That’s not always the case. It could actually go up or stay the same. To help you manage this uncertainty, consider allocating your savings among three types of accounts:

  1. Tax-deferred (traditional IRA or your employer’s retirement plan)
  2. Tax-free (Roth IRA)
  3. Taxable (brokerage and bank accounts)

This approach offers the flexibility to create a withdrawal strategy that helps minimize the amount lost to taxes. For example, depending on your situation, you may decide to take money out of your taxable account first before your IRA or 401(k) plan. And remember, Medicare premiums are based on your taxable income. Reducing your taxable income in retirement may also reduce your Medicare costs. 

Understand your deduction options. In 2020, the standard deduction for couples filing jointly rises to $24,800 ($12,400 for individuals). With this higher limit and other changes, including limits on state and local tax deductions and a lower threshold for mortgage interest deductibility, it may no longer make sense to itemize your deductions. Of course, you won’t know for certain until you crunch the numbers for your tax return. You should consider picking the option that reduces your taxable income the most. 

If you want to increase the amount of your itemized deduction, consider bundling your charitable donations. Rather than contributing to your favorite causes every year, combine the annual amounts and make the contribution every other year. This change may be enough to push your itemized deductions above the standard deduction threshold for the year you make the aggregated donation.

Stretch Your Savings

In retirement, you need a regular stream of income to cover monthly expenses and other activities. However, if you take out too much too soon, your nest egg may quickly disappear. Consider these strategies to help your retirement income last longer. 

Put a portion in annuities. Fixed and variable annuities provide income for life, which you can you use to help meet your living expenses.These regular, monthly payments also give you the opportunity to use your other savings for the things you enjoy. The type of annuity you choose will depend on many factors, including your goals and risk tolerance. Fixed annuities provide a guaranteed amount of income. Variable annuities may help you cover rising costs, such as healthcare, because they offer the potential for growth in addition to income. You may even be able to cover your spouse via a joint and survivor annuity, and add in a cost-of-living adjustment to your distribution to help keep pace with inflation.

You may also want to consider longevity insurance. You start receiving payments when you reach older ages (80-85) so it helps prevent you from out-living your assets. 

Take advantage of health savings accounts (HSAs). Are you participating in a high-deductible health care plan? If so, consider using a Health Savings Account to save for future medical expenses. HSAs offer three potential tax benefits:

  1. Pre-tax contributions, like a 401(k) or 403(b)
  2. Tax-free income
  3. Tax-free distributions for qualified medical expenses, including premiums and deductibles  

Plus, using an HSA to pay your medical bills can help free up your retirement savings for other things. For 2020, individuals can contribute up to $3,550 ($7,100 for families) to an HSA. If you’re age 55 or older, you can contribute an additional $1,000. 

Manage required minimum distributions (RMDs). Once you turn age 72, you have to start taking required minimum distributions from your traditional, SEP, or SIMPLE IRA. You may also have to receive distributions from your employer’s retirement plan, unless you’re still working. RMDs are calculated based on your life expectancy and account balance. And they’re taxable in the year you receive them (except for Roth 401(k) RMDs).

If you expect your tax rate to be higher at age 72, you may want to consider converting some of your traditional IRA to a Roth IRA. You’ll pay regular income tax on the amount you convert, but hopefully not as much as you would pay later on. Plus, Roth IRAs aren’t generally taxable in retirement, nor subject to the RMD rules, and the money may continue to grow. Keep in mind, if you wait until age 72 to convert, you’ll still need to take your RMD for that year. 

Say Good-bye to the Monster Under the Bed 

The fear of running out of money in retirement keeps many people up at night. By creating a financial plan that helps minimize your taxes and provides lifetime income, you may be able to put these fears to rest.


Key Takeaways

  • Create a retirement withdrawal strategy to minimize taxes

  • Understand all the ways to stretch your retirement income

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