Avoid Paying Excessive Taxes

I’m continuing my review of the complexities of taxes in retirement and how you can reduce them and avoid overpaying. We briefly covered the Required Minimum Distribution (RMD), the IRS requirement to withdraw funds starting at age 73. We also looked at the importance of how you own your investments and ensuring you’re not at the mercy of fund managers buying and selling without regard for the tax impact. At Lord & Richards, we care deeply about topics like these. 

Next, let’s examine the impact of Social Security. If you’re in your 50s or younger, you should do everything possible to put your money in tax-free investments to avoid taxes on your Social Security benefits. Social Security isn’t taxed simply based on what you receive; it’s more complicated than that. The good news is that if you plan correctly, you could end up paying no taxes in retirement.

You could have no taxes on either Social Security or other income you withdraw. This is one of our specialties at Lord & Richards. Along with your investment, estate, and health care plans, we develop a comprehensive written plan to help reduce and mitigate taxes. You don’t want to fall short here, and the younger you are, the more power you have to shape the outcome.

Many of you may be contributing to a 401(k), so I’ll start there: contribute to your Roth 401(k). If your company offers it, take advantage of it. Your tax preparer may advise against this because you’ll pay more taxes now, but ask yourself: do you want to pay taxes today when rates are historically low and you’re paying on the seed? Or do you want to pay them later, when you’re older, rates may be higher, and you’re paying on the harvest? My preference is to pay taxes on the seed before the money grows too large, allowing it to grow tax-free from there. At Lord & Richards, we help you achieve this with a comprehensive written plan.

 This strategy is crucial for the many people who already save in 401(k)s, IRAs, and other taxable investments or who will have taxable income from rentals, pensions, and other sources in the future. Here’s the bottom line: the worst-case scenario is that 85% of your Social Security benefits could be taxed. For example, if you and your spouse receive $6,000 a month — $72,000 a year — and 85% of that is taxable, you’re giving up a significant amount. The additional income you earn from other sources makes that 85% taxable. However, if your other income is from tax-free sources, none of that $72,000 would be taxable. At Lord & Richards, we can show you how to make that happen.

For most people, if you’re taking distributions from IRAs, pensions, or other income sources, some portion of your Social Security will be taxable. The IRS uses what they call Provisional Income, which starts with half of your Social Security check. For example, if a couple receives $60,000, half of that, $30,000, counts toward provisional income. If your total provisional income exceeds $32,000 (for joint filers), then up to 50% of your benefits become taxable. If it exceeds $44,000, then up to 85% of your benefits become taxable. You can see how easy it is to pay significant taxes on Social Security. We want to help you avoid that.

We also need to consider Medicare. In addition to the impact of your income on Social Security taxes, it also affects your Medicare Part B and Part D premiums. The IRS looks back two years at your income, and that determines your premiums now and moving forward. Given that timeframe, it’s essential to include both Social Security and Medicare benefit planning in your overall strategy.

Lord & Richards has excellent software to help you navigate this maze. Our simple goal is to optimize your Social Security benefits and minimize how much you pay in taxes for Social Security and Medicare, coordinating everything with your other income sources. It’s a complex process, but we can simplify it for you as part of your Retirement Freedom Review™, at no cost to you. We’ll develop a plan to minimize taxes, optimize benefits, and increase your financial freedom. That’s what it’s all about, and my team and I would love to chat with you. It simply starts with a phone call.

Investment Advisory Services offered through Lord and Richards Wealth Management, LLC, a Registered Investment Adviser