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Tax Planning for Retirement Part 1: The Most Important Question

Tax Planning For Retirement: Part I

What's the Most Important Tax Planning Variable to Consider?

Tax planning for retirement is hugely important. As the old adage goes, 'it's not what you earn, it's what you keep.' Given that most retirees will be on some sort of a fixed income from sources like social security, a pension, and their investment portfolio, maximizing after-tax cash flow crucial. 

More, to the extent possible, tax planning for retirement should start well before retirement. For example, debating whether to contribute to a Roth-style retirement account or a deferred/traditional-style retirement account is largely a tax planning and retirement planning question. Questions like this matter no matter what stage you are in of your retirement journey, accumulation, preparing for retirement, or already retired. 

When planning for retirement, one pressing question you must yourself is this: Will your tax rate be higher now or in the future?  

Tax Planning 101: Will Your Tax Rate be Higher Now or in the Future? 

When doing tax planning for retirement, the first question you must ask yourself is the following: will my tax rate be higher now or in the future? 

This one question permeates most retirement tax planning questions: 

  • Should I make pre-tax or Roth style contributions? 
  • What investments should I buy?
  • What investments should I sell?  
  • Should I do Roth conversions? 
  • What accounts should I distribute from in retirement? 

For example, if you are in your peak earnings years, you should likely contribute to a pre-tax 401k, deferring taxes until distributions in retirement, when your tax rate will likely be lower. If your income and marginal tax rate are lower now than you expect they will be in later years or in retirement, it may make sense to opt-into Roth style contributions, paying taxes now, but allowing for tax-free growth and withdrawals in retirement.  

Pre-Tax IRAs and 401ks: Defer Taxes Until Retirement

Pre-Tax IRAs and 401ks Defer Taxes Until Retirment

Roth IRAs & 401ks: Pay Taxes Now for Tax-Free Distributions in Retirement


A few other situations where tax planning is hugely important

  • Should I participate in my employer's deferred-compensation plan? 
  • Should I realize capital gains on my taxable investments? 
  • Should I exercise my stock options? 

Unfortunately, there is no consistent answer for every individual and situation. That's the planning part. Your financial situation and future expectations are unique and demanding of thoughtful planning. 

Interest in planning for a secure and tax-savvy retirement? Schedule a call with one of our Certified Financial Planners™ below: 

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