Tax planning during retirement can be complex. Often individuals (and CPAs for that matter) become focused on minimizing this year’s tax bill. This sounds like a good thing, but it is not the purpose of tax planning.
The purpose is to maximize your and your family's wealth. Usually this means minimizing taxes over time, but that may differ from just minimizing this year’s taxes.
Many retirees have assets held in retirement accounts that are taxed as the assets are withdrawn to cover expenses. A retiree may also have after-tax investment accounts, savings in money markets, CDs or even lines of credit. Deciding where to draw money from to cover expenses may be challenging and the choice might affect your taxes. Over time a retiree might avoid withdrawing money from an IRA to avoid paying taxes. However, in the future minimum distribution rules force withdrawals from the IRA, which can push the retiree into a higher tax bracket.
If you have pockets of money with different tax treatment, this should be discussed with your financial advisor. Managing your taxable income during retirement could affect healthcare costs (both for government subsides and Medicare), the tax treatment of Social Security and can lead to significant difference in long-term family wealth.
At Adams Financial we have a number of advisors with a background in tax planning and we work with many excellent accountants and tax professionals. Tax planning is a cornerstone of financial planning, but good tax planning doesn't always mean that you don't need to pay taxes. In the end, we would rather our clients make money and pay taxes if the alternative is to not make money.
One of the difficult issues in tax planning today is that we do not know a lot about future tax rates. The current discussion in Washington continues to point to a tax cut and tax restructuring. This doesn't mean that everyone will pay less in taxes in the future. We expect some tax reform in 2017, and we will work hard to understand the impact any tax change may have on out clients.
Bottom Line: Sometimes out clients neglect to discuss their concerns about their tax situation. We do not prepare taxes, but we are happy to work with you and your tax professional to make sure that tax planning is consistently addressed.