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February 04, 2022

Tax Considerations in Retirement are of Paramount Importance

Good retirement planning should always include a tax strategy. Certain investments let investors defer taxes now to maximize principal.  Other instruments have tax obligations in the beginning, permitting tax-free income later. Knowing the options available is key to good decision making.

Minimize Your Tax Obligations

The Only Two Certainties in Life are Death and Taxes is an oft repeated quote of Benjamin Franklin. It is true that there is no avoiding the taxman. Even a sales tax is added to the purchase of a pack of gum. Society could not function without tax revenues so paying one’s fair share is, in a sense, a patriotic duty. Citizens don’t have the right to avoid tax but are allowed to minimize what they pay. Minimizing a tax obligation usually requires a plan.

Our national debt keeps rising. One day the chickens will come home to roost and that debt will have to be paid. It is likely that taxes will rise to pay what’s owed and fund more out-of-control spending.  Retirees would be wise to plan so that investments are protected from high taxation.

Tax Strategies for Retirement

Tax saving strategies abound. Here is a sample of some possible approaches:

  • Buy and Hold – capital gains are taxed only when realized. Hold onto an investment and no taxes are owed, even if it increases in value. Studies also show that, in the long run, passive investing outperforms active investing.
  • Municipal bonds – interest on municipal bonds is tax free on a federal level and sometimes on state and local levels, as well. Interest rates are typically less than corporate bonds, but those in a higher tax bracket can enjoy some significant savings here.
  • Roth IRAs – these Individual Retirement Account contributions are not deductible on a tax return but allow for qualified distributions to be tax free in the future.
  • 401(k) plans – allows you to defer money from your paycheck on a pretax basis. However, you will pay ordinary income tax on distributions in retirement.
  • Social Security – it is likely that your Social Security payments will be taxable unless there is no other income. Reviewing the whole retirement income package can shed light on what year is best to begin collecting these distributions.


Knowing the Tax Implications

A tax analysis should be an essential part of any retirement plan. The tax code is complex and ever changing. Consulting with a trusted financial advisor or certified public accountant is highly recommended.