Tax season is in full swing, and it can bring some uneasy thoughts. “How much will I get back?” “How much will I owe?” “Am I forgetting anything?” “What can I expect next year?”
In a recent team meeting, one of our firm’s partners shared a question from a client that’s often not heard, “Why is my tax bill so low?!”
This client had been taking significant IRA distributions since the beginning of retirement as they had settled into a routine of travel and other retirement leisure. Of course, IRA distributions are generally going to be taxed as income, and the client became accustomed to paying a steady tax bill each year. In recent years, their travel slowed and their expenses correspondingly decreased, but their regular withdrawals had not.
During a meeting with us last year reviewing their financial plan, this client shared their updated spending with us. As our team reviewed the numbers, it was clear that they were taking far more than they needed even after accounting for required minimum distributions (RMDs) from their IRAs.
With less travel spending and a bloated checking account balance, our team updated the client’s plan and made the simple recommendation of reducing distributions to align with their current expenses. Specifically, reducing the excess withdrawals (above RMDs) from the IRAs lowered the client’s taxable income.
As the client filed their tax return, they were pleasantly surprised to find their tax bill is far lower: $20,000 lower!
This seeming simple tweak just illustrates the power of having a system, structure, discipline, and support in managing your wealth, and this example is just the tip of the iceberg. Life happens, and circumstances change. When is the last time you reviewed your situation to ensure your financial plan is still serving your needs?
Investors in the U.S. are keenly aware of how managing taxes can help to build wealth—as evidenced by the trillions of dollars that we’ve invested in IRAs, 401(k)’s and other tax-sheltered accounts.
What too many of us fail to consider, however, is the need to remain tax-conscious even after we’ve built our wealth. For retirees seeking to preserve and appreciate their wealth, tax-savvy decisions are especially important.
One of retirees’ key tools for tax management is known as retirement withdrawal sequencing. In plain English, this refers to the order in which you make withdrawals from various account types to fund your retirement.
Those who have saved successfully often have a combination of taxable, tax-deferred and tax-free accounts. When that’s the case, proper planning about which accounts to tap first can allow you to defer a substantial amount in taxes while maximizing the opportunity for the remaining accounts to appreciate.
The Department of Labor (DOL) will be coming out with a major decision next week that will effect virtually all financial professionals and clients, as they provide guidance that addresses the most
important decisions of our financial lives; what to do with clients 401(k) once they retire. Retirement investors are harmed – primarily in the form of higher costs and lower retirement savings –
when they receive conflicted advice that puts the adviser’s interest ahead their own.
By requiring fiduciary accountability for all advice related to retirement assets, the rule will provide much needed protections to help retirement investors navigate the complex and confusing financial services marketplace.
For many Americans, whether to rollover and how to invest their retirement nest egg, is one of the most important financial decisions they will make as there is more than $14.4 trillion of retirement assets in 401(k) plans and Individual Retirement Accounts (IRAs). Under the current regulatory framework, all advisers are not required to make rollover IRA recommendations in their clients’ best interest, leaving Americans subject to conflicted advice related to their retirement savings.