What is Retirement Distribution Tax Planning?

Retirement distribution or withdrawal tax planning, simply put, is putting a strategy in place that will help make your retirement nest egg last as long as you do. We often focus on how much we have saved, what it is invested in, and what types of accounts those investments are in. While these are essential points, they aren’t the whole picture.

So, what is the “whole picture”? A large part of it is how your retirement money is taxed, when it is taxed, and how much it is taxed. To figure this out we need to take some specific steps.

1. First, we gather data on what you have and where those investments are located.
2. We then run analysis on those assets and accounts in three specific scenarios in order to learn what decisions we can make and implement today to insulate your retirement income from future tax increases.

Retirement Scenario Analysis

Scenario A

Input

Our first scenario assumes that we have never met with you and you continue to do everything that you are currently doing for your retirement. You change nothing and stay the course. For this hypothetical we also assume that somehow tax rates stay exactly the same as they are today in perpetuity.

Output

Our analysis, based on these assumptions and conditions, will show us exactly how long your money will last if NOTHING changes from the way it is today.

Scenario B

Input

Our second scenario assumes that again, you make no changes to what you are currently doing for your retirement. However, in this hypothetical, we assume that tax rates will double in the future. This means that the taxes on your retirement income would be double what they are now when you begin withdrawing them as spendable income in retirement.

Output

Based on this set of conditions, our analysis will show us if your retirement savings would last longer or shorter than Scenario A when taxed at a much higher rate.

Scenario C

Input

Our third scenario assumes that you made changes to your retirement account types by moving assets from “forever taxed” accounts to “never taxed” accounts. By doing this, you would take advantage of historically low tax-rates, keep more of your money at work in the markets, and insulate your savings against future rate-hikes.

Output

This analysis will show us how much longer your retirement savings will last without unnecessary tax burdens eroding your capital.

What’s Next

Once this process is complete, we have more clarity on what scenario we are working towards and what exactly we have to work with. We can then tweak your accounts and investments accordingly to properly prepare you for the withdrawal or income phase of your retirement. However, this is just the beginning of the story.

Let’s not forget about Social Security Benefits. Even those get taxes! That is why the next part of the story and the next phase in our process looks at your provisional income by using the IRS Provisional Income Calculation to determine your tax threshold. This is a key piece of the puzzle because understanding where you are and at what threshold you will be taxed can help neutralize social security taxation and keep you below the level where 85% of your Social Security Benefits would be taxed.