It turns out, people in retirement think about taxes differently than people who are active in the workforce. Why? Because retirement is when a lot of tax-deferred money gets un-parked and the taxman comes calling.
Almost everyone has some money in an IRA/401(k)/403(b)/457. They are touted as a tax-deferred wonderland. They are heralded in this manner because they put your money out of sight and into an instrument that will get pay out in your golden years. Out of sight and out of mind.
This all sounds good, which is why these accounts are such a go-to for retirement savings. But we, of course, have an uncommon approach, and as such think about these products a bit differently.
Before starting something, we think you should plan with the end in mind. That doesn’t sound so different – or does it? What’s more “planning with the end in mind” than putting money into a retirement plan? To answer that, let’s take a look at the following:
0+ 59.5 70.5+
Accumulation Phase – Free to withdraw at will IRA totals subject to No withdrawals without penalties RMDs
The truth is, people often save this way without having a full picture of what they are getting into. We have lots of clients that are now in their 70’s who don’t necessarily want to draw on this money but are now forced to take it out in Required Minimum Distributions (RMDs).
Conversely, we have many clients in their 30’s and 40’s who could really use the money they hide away in their retirement accounts to better advantage right now.
Why is our mindset different in retirement? Why do we wait until then to all the sudden think about taxes? Because, again, taxes largely take place out of sight, out of mind. Just like the money that gets put away into a 401(k) or other retirement accounts, while you are working for an employer you don’t think about taxes as much because it is withheld from each paycheck. Maybe you look at those withholdings every now and then.
But here’s the thing: when you retire and start drawing the money out of these vehicles, that is when the tax ramifications are triggered. That’s when that tax-deferred out-of-sight, out-of-mind mindset goes out the window. They’re taking money out of my account! And while taxes will happen one way or the other, there are ways you can minimize the impact. As financial planners, we’re not tax specialists, but believe me, we are always thinking about the tax ramifications when we suggest a given course of action with your money.
So what are your choices? Are there ways to minimize the impact of taxes on retirement plans? In short, yes.
One alternative is to just not put as much in. I’ve written in the past about how an employer’s 401K match sounds wonderful and your instinct and everything you’ve learned tells you to take full advantage of it. But there are other ways to build your wealth, so getting that full employer match does not need to be your top priority.
There are other ways to reduce tax liability and shelter income, like owning a business. Further, there are ways to generate income now and shelter taxes – yep, like owning a business!
This all goes back to our philosophy that if you are doing something you love, you never want to retire. Owning a business can mean a lot of things – it doesn’t have to mean the constant grind of work – because we know the whole goal is to create time freedom in your life.
Most of us will have some money in a 401(k), IRA, 403(b), or 457 plan. But if you understand the tax ramifications, you can plan well and have multiple sources of income that have different tax treatments. Tax diversification is a real thing and comes with a comprehensive plan.
Contact us here to schedule an appointment to discuss this further.