Taxes on Retirees

Taxes on Retirement Income

As a retiree, you may have more control over the taxes you pay on your retirement income than you realize. With a variety of retirement income accounts and proper planning, you may be able to reduce the amount you pay each year in taxes. Listen to Josh’s video below to learn more.

My brother Jamie, the print enthusiast.

Growing up, my brother Jamie was never somebody you would refer to as a great student. And if he’s watching this I think he’d probably agree with me. He had more fun playing sports and messing around with his friends than he did going to school, which is very normal. He always struggled and didn’t really enjoy it until high school when he found the wonderful world of printing.

And by printing I’m referring to “ink on paper.” Our high school had a big print shop and class, and this very quickly became his passion. He learned a ton about printing really fast, became a great printing student, and went to college as a print management major. For the last 15 years he’s made his career in the printing world and has done quite well.

To this day if you bring up printing, or if you give him a magazine, he looks and examines it. He looks at the ink on the paper, feels the texture, then tells you exactly what machine they used to put that ink to paper.

I look at him and my eyes completely glaze over. “How the heck do you know that? And how can you be so excited talking about this?”

I get excited talking about taxes on retirees.

Well I have my own version of this, and it’s income taxes on retirees. Yep, it’s going to put most people to sleep, but I get kind of excited talking about it as taxes in retirement are a huge deal and something most people aren’t talking about.

Once you understand it, I think it’s something that you can learn to take seriously as well. Now when I talk about income taxes I’m explicitly talking about taxes on your income. I’m not talking about sales taxes or property taxes or other taxes that retirees pay. I’m talking strictly about income taxes.

In your working years you don’t have a ton of control. You’ve got a paycheck, you’ve got income coming in the door. And other than putting money in your 401k, or some charitable contributions, how you structure your mortgage, etc, there’s not a lot you can do. But in your retirement years, you have a lot more control about something us dorky accountants refer to as revenue recognition when you decide to recognize income.

Let’s all agree: If there’s a tax that you don’t necessarily need to pay, let’s find a way to not pay that tax.

And when we talk about taxes I like to break it down into the fact that there’s two different types of taxes. The first type of tax is one that you don’t necessarily have to pay. And I always tell people, I think that we can all agree that if you don’t necessarily have to pay, let’s try and find a way for you not to pay that tax. People are usually pretty good about that. :)

Then there’s a second type of tax which is one that no matter what, come hell or high water, you’re going to pay. You’re either going to pay it while you’re alive or you’re going to pay it when you’re gone.

You’re going to pay that tax.

And if that type of tax exists, your goal, your single goal, should be to pay the smallest amount as possible.

My wife is an avid coupon clipper and one of her favorite stores is Kohl’s. The other day I went to pick something up for her and the lady at the cash register asked me, “Do you have any coupons?”

I don’t ever think about coupons, but the lady at the register told me “You can’t buy this unless your wife gives you coupons.” Naturally my wife was very grateful for the lady at the register, but that’s the type of spending that we have.

If you can find a way to cut taxes, that’s no different than getting the Kohl’s Buy 1 Get 1 50% Off sale. Those taxes are going to impact how much you spend in retirement more than any single variable. For most people these taxes are the ones you pay on your IRAs and your 401ks.

For some people it’s capital gains taxes, for others people they have to worry about taxes on social security, etc. But you know what? They’re all tied together.

Tie together your income plan, tax plan, and asset allocation strategy.

And if we can structure a plan to tie together your income plan, your tax plan, your asset allocation strategy If we can tie those three things together, we can minimize your taxes over your lifetime.

Another consideration to think about in today’s day and age is that taxes are relatively low. As I’m recording this (November 2020), the U S debt clock was over $27 trillion.

$27 trillion…with a “T.”

As that continues to rise, you have to believe that our government is going to need to find a way to add revenue to their coffers.

What’s one way they can do that? An increase in taxes. For a lot of people currently in their retirement it may be the time we recognize revenue so that we don’t have to in the future. But you have to understand how your situation works.

The thought process of putting money into your 401k, or into your IRA, because you’re going to be in a lower tax bracket when you retire is true for some people. But for the vast majority it’s really not true at all.

For the vast majority of people they’re in the same, if not a higher, tax bracket. Sometimes they don’t even realize it! They have these required minimum distributions that kick in and all these different forced incomes that come into play, that they weren’t paying any taxes at all.

Then all of a sudden…WHAM!… they get hit with higher taxes.

Taxes in retirement is not the most riveting topic in the world, but there are critical considerations that you need to make in order to minimize your taxes.

If uncle Sam decides to increase his revenue you don’t want to worry what will happen to your income. Or if you need more money you want to be able to put yourself in the most advantageous position possible so that you have the most control for yourself as humanly possible.