Page 40 - BusinessWest October 2, 2023

Planning Is the Key
Develop a Strategy Now to Be Tax-efficient In Retirement
BY BARBARA TROMBLEY, CPA
“When I ask clients what
their target monthly spend in retirement is, they never consider the tax effect.”
Does anyone like to pay taxes? Most of my clients tolerate pay- ing taxes like eating their least-favorite vegetables. They are difficult to calculate and hard to understand, especially with a
business generating uneven cash flow or an employed couple with disparate incomes.
But what if I told you there are ways to eliminate taxes in retire- ment or minimize federal taxes to a palliative 12% bracket?
Tax planning is an important part of retirement planning. When
I ask clients what their target monthly spend in retirement is, they never consider the tax effect. For instance, a married couple may say they need to generate $6,000 per month to pay all their bills when they retire. Typically, this means the dollar amount that is deposited in their bank account.
But as a financial planner, I immediately think of the gross amount. How much do we need to generate on a gross level, before taxes, to net them $6,000? Depending on the source of funds, some of my clients may have a tax bill of zero, allowing them to draw only the $6,000 per month out of their investment account(s)!
How can this be? Most retirees rely on Social Security to gener- ate a large portion of their income. Some people pay tax on Social Security, and others do not. Whether you pay taxes or not depends upon your total combined taxable income. Combined income includes your adjusted gross income, any non-taxable interest you receive, and half of your Social Security benefits (adjusted gross income includes earnings, investment income, retirement-plan with- drawals, pension payments, and other taxable income.)
If a married couple has a combined income of less than $32,000, then none of their Social Security income is taxable on a federal
level or in Massachusetts. For a single person, the limit is $25,000. Depending on the outcome of this formula, 85% of Social Secu- rity benefits could be taxable. The key to paying no federal taxes in retirement is to have other, non-taxable sources of funds.
How can you plan now to possibly pay zero taxes in retirement? A Roth 401(k) or Roth IRA is the best place to start. Most employer 401(k) plans now have a Roth option. This is when your contribu- tions are made on an after-tax basis instead of pre-tax. If you are in a high tax bracket now, you would need to consider the tradeoffs of paying taxes now to not pay later.
In 2023, the limit for Roth 401(k) contributions is $22,500 with a $7,500 catch-up contribution for those over age 50. If you do not have a 401(k) plan at work, you can make a Roth IRA contribution of $6,500 per year, or $7,500 per year if you are over age 50. When you withdraw Roth funds after age 591⁄2, the withdrawals are tax- free and do not impact taxable income.
Another great source of non-taxed income in retirement is invest- ment accounts or savings outside of retirement accounts. If invested efficiently, where capital gains and interest income can be mini- mized, drawing from these accounts in retirement can have little effect on taxable income. Tax-efficient investing may involve putting interest-generating investments in a Roth IRA and keeping invest- ments that generate long-term capital gains in a brokerage account.
For an example of efficient tax planning, consider client couple A versus client couple B. Both
clients are married and file taxes jointly. Each of these couples would like to gen-
Planning
Continued on page 42
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grenierfinancial.com | Fax: 413 731 7268
Life’s a Journey.
Let us walk the road with you. It’s what we do.
Pat Grenier, Principal
RR, CFP®, MBA
[email protected]
MA One Monarch Place, Suite 810 Springfield, MA 01144
413 736 6712
CT 265 Main Street Wethersfield, CT 06109
860 721 7880
Securities and advisory services offered through Cadaret Grant & Co., Inc., an SEC Registered Investment Adviser and member FINRA/SIPC. Grenier Financial Advisors and Cadaret Grant are separate entities.
40 OCTOBER 2, 2023 << WEALTH MANAGEMENT >>
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