here<\/a>.<\/p>\nRegards,
\nYour Partners at MGFS<\/p>\n
Chapter 16
\nTax Planning and Order of Distribution<\/h2>\n
\u201cA penny saved is two pennies earned \u2026 after taxes.\u201d<\/em> (Randy Thurman \u2013 author)<\/p>\nThe primary objective of a tax-efficient withdrawal strategy is to increase after-tax retirement income by saving on taxes. A withdrawal strategy needs to be a customized approach for your circumstances and flexible to react to tax law and lifestyle changes. There are several categories of assets or accounts that can be converted into retirement income. For simplicity, we will refer to account types below:<\/p>\n
\n- Taxable (non-qualified) <\/strong>\u2013 An account that is owned by an individual, joint tenants, or trust. Earnings distributions such as interest, dividends, and capital gains, are taxed, with some exceptions.<\/li>\n
- Tax-deferred (qualified)<\/strong> \u2013 Employer-sponsored and individual accounts set up for retirement purposes. Taxes are deferred until distributions are made and then fully taxable as ordinary income.<\/li>\n
- Tax-deferred (non-qualified) <\/strong>\u2013 Accounts that grow and produce earnings that are taxed upon distributions, such as annuities. When withdrawals are made from annuities and executive deferred compensation programs, the earnings are taxed first and treated as ordinary income. Once earnings are depleted, the initial investment, or cost basis, is returned tax-free. Executive deferred compensation programs are fully taxable when distributions are made.<\/li>\n
- Tax-exempt <\/strong>\u2013 Employer-sponsored Roth 401(k) plans, Roth IRA accounts, and municipal bond investments. With more advanced planning, cash values from life insurance policies and home equity can be additional sources of tax-exempt income.<\/li>\n<\/ul>\n
There are no specific rules regarding the order in which you take distributions but many strategies are dependent upon your financial circumstances. You will likely derive your income from a combination of these accounts. For best practices when using your investments for income, consider the following general guidelines:<\/p>\n
\n- The more you can move into tax-exempt accounts, the more tax-efficient your retirement plan will be. Some people employ a systematic conversion strategy to achieve this goal.<\/li>\n
- If you own non-qualified annuities, they will need to be assessed independently.<\/li>\n
- If you own highly-appreciated, non-qualified investments, you may choose to keep these intact for your heirs to receive a step-up in cost basis (in order to manage, if not eliminate taxes).<\/li>\n
- Tax harvesting non-qualified accounts (the offsetting of realized gains with directed losses) can be a good way to manage taxes.<\/li>\n
- Tax bracket management should be carefully considered to minimize unintended consequences with capital gain rates, taxable social security, Medicare premium expenses, and increased marginal tax rates; all of which may require greater withdrawals to meet your income objectives.<\/li>\n
- Required minimum distributions (RMDs) from your qualified accounts should be identified and calculated. You should review past tax returns, current projections, and tax brackets to determine adequate tax withholding.<\/li>\n
- Thinking about delaying your RMDs? In certain situations a Qualified Longevity Annuity Contract (QLAC) may make sense.<\/li>\n
- Spending needs should be reviewed once or twice a year to determine if adjustments are needed.<\/li>\n
- There are several kinds of IRS penalties for tax-qualified accounts or non-qualified annuities if distribution rules are not followed. Also, there are numerous exceptions for penalty-free withdrawals prior to age 59\u00bd. If unfamiliar, it is important to consult with your tax or financial advisors.<\/li>\n
- Look for opportunities in low-income years to do a Roth conversion. (See Chapter 17)<\/li>\n
- Consider charitable giving for both philanthropy and as a tax strategy. These approaches can be implemented annually. Among many IRS-approved charitable strategies, Qualified Charitable Distributions (QCDs) and Donor-Advised Funds (DAFs) can be effective!<\/li>\n<\/ul>\n
Having different categories of accounts will provide flexibility for tax-sensitive cash flow and allow for an effective tax diversification strategy. Since everyone\u2019s financial situation is unique, you will want to review your income and tax strategies each year. No surprise, you may want to consult with your advisors to fine-tune these processes for optimal distributions.<\/p>\n
The Lighter Side of Aging from Bob Hope<\/strong><\/em><\/p>\n\n- You know you are getting old when the candles cost more than the cake.
\n<\/em><\/li>\n- I don\u2019t feel old. I don\u2019t feel anything until noon. Then it\u2019s time for my nap.
\n<\/em><\/li>\n- The older you get, the tougher it is to lose weight, because by then your body and your fat are really good friends.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"
Barry and Adam wrote and published the book \u201cGuided Retirement Income Planning\u201d in November 2020 to create higher levels of financial literacy and to show a comprehensive and logical process for executing income planning in retirement. Since we believe that this subject matter is so important and relevant, \u00a0we are going to roll out one […]<\/p>\n","protected":false},"author":2,"featured_media":2553,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/posts\/2555"}],"collection":[{"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/comments?post=2555"}],"version-history":[{"count":6,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/posts\/2555\/revisions"}],"predecessor-version":[{"id":2561,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/posts\/2555\/revisions\/2561"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/media\/2553"}],"wp:attachment":[{"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/media?parent=2555"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/categories?post=2555"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mgfs.net\/wp-json\/wp\/v2\/tags?post=2555"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}