5 Best Practices for Limiting Your Tax Burden in Retirement

I'm Jason sit for Morningstar death in taxes may be inevitable but with taxes you can exert some amount of control over what you pay here to offer some best practices for limiting your tax burden in retirement as morning stars Christine Benz Christine thanks for joining me Jason great to be here there are some ways that you can limit taxes in retirements and best best practices as you call them the first one is to really bear in mind that withdrawal sequencing rules that you should follow so that you're making tax efficient withdrawals from your portfolios that's right and I would call them guidelines rather than rules because as we'll discuss they can be bent at various points in time and it might make sense to bend them but I think it does make sense as you're thinking about your retirement strategy how you'll get distributions from your portfolio it does make sense to think about the overall logic behind these guidelines and the basic idea is that you want to preserve those vehicles that give you some sort of tax advantage hang on to those as long as you possibly can while spending those assets that have fewer tax benefits associated with them so when we think about sort of the standard withdrawal guidelines you're certainly going to start with required minimum distributions if you're subject to them there's really no way around them you've got to take them so that's step one then taxable assets would be the annexed accounts to tap again no inherent tech saving features although capital gains rates are nice and low currently then moving on to tax traditional texts deferred vehicles these would be traditional IRAs assets and traditional non Roth company retirement plans and finally you want to save those Roth assets for last not only are they the most attractive from a tax standpoint during your lifetime but they will also tend to be the most attractive for your heirs to inherit from you so if there's money left over at the end of your lifetime your heirs will be very grateful if it's in some sort of a Roth wrapper and of course you'll never have to pay RMDs on Roth that's right that's best practice number two as you were saying is remembering that rules were meant to be broken so some of those rules you just said they may you need may need to bend them depending on the context of situation so when should I be flexible with those rules right so I I think one thing I've heard certainly from tax planners is the last thing you want to do is sort of wrote Li go through each of these account types and deplete them so go through your taxable spend it all down until it's gone then move on to tax deferred ideally you want to keep some of these accounts alive throughout your lifetime and the reason is that at various points in time it may be more or less it advantageous for you to tap them so a great example would be even if your Roth assets are typically in sort of the save for later pile there may be years where you really need those tax-free withdrawals maybe you have very high RMDs required minimum distributions because your traditional IRA has performed really well you need a little bit more money to live on taking those tax-free withdrawals can be a way that you can potentially keep yourself in a lower tax bracket so flexibility maintaining assets and all three account types is a really valuable tool for retirees to have in their Arsenal's and ideally one for them to keep throughout their retirement years so best practice number three if you may be drawing from these different accounts at different times throughout retirement you want to make sure that those accounts are all all have some degree of diversification in them that's right so even though the withdrawal sequencing guidelines would generally call for having your longest term assets and the Roth accounts because that's what you want to grow the most you're getting a big tax benefit you won't pay taxes on those withdrawals if you will periodically be maybe taking pieces out of that Roth account you want to make sure that you are able to take some liquid assets that you're not having to maybe tap an equity account when it's at a low ebb because that won't make sense even though it may be advantageous from a tax perspective so thinking about maintaining some asset diversification within each of those three major account types can be a very valuable tool and best practice number four has to do with what you call a sweet spot it's an age range right before you you were right when you start to retire but before you have to take RMDs in which you have maybe a little more flexibility and could do things like a Roth conversion right with people working longer this is getting to be an increasingly compressed peer of time but the basic idea is if you've retired you're not earning a salary you're just drawing from your portfolio so that may be a good time to make those conversions because you're not taking those RMDs which could bump you up into a higher tax bracket you may be able to keep yourself in a very low tax bracket during those years the tricky part is is that we've sometimes heard about the go go slow go no-go cycle throughout retirement this is often times when people are feeling most active they're feeling like doing some of the expensive travel where they would want to be drawing upon their portfolios so it's definitely a balance many people in these years say between age 65 and age 70 really aren't feeling like short-shrift in themselves from a quality-of-life standpoint so you've got to find that right balance but it is something to explore particularly if you do have a lot of traditional IRA 401k assets that are going to be subject to our MDS best practice number five don't be afraid to ask for some help that's right I think that this is all complicated stuff and so I do think it's important for retirees to think about identifying a tax advisor or a financial adviser who's really well versed in tax matters to help you figure this out this tax efficient withdrawal sequencing to help you determine how you can keep yourself in the lowest possible tax bracket I think when you step back you realize just how many moving parts are in the mix so you've got RMDs you've got deductions which you may or may not be able to control you've got potentially subsidies under the Affordable Care Act that you may be eligible for you've got Social Security and and various elements of taxation that fall under that umbrella so a lot of moving parts this is an area I think where an advisor can be very beneficial even if you've been a dedicated do-it-yourselfer throughout your retirement years another big moving part of course is estate planning which is also an important tax consideration at this time and an important place to get help so I think if you've got an estate planning adviser that person who can really help you make sure that you have your beneficiary designations that those make sense and that person can also help you figure out well of these various pools of assets which are going to be the most attractive for me to spend during my lifetime which am I better off trying to leave to kids grandkids other loved ones in my life five great texts best practices for retirees Christine thanks for joining me thank you Jason from Morningstar of Jason snip thanks for watching

Channel: Morningstar, Inc.

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Keywords: morningstar, investing, stocks, funds, etfs, mutual, market, taxes, retirement

Id: dzQR7RfbmR4

Length: 7min 2sec (422 seconds)

Published: Tue Mar 03 2015