When your retirement planning includes living off your nest egg, managing federal and state taxes is key to enhancing the amount of money you have to spend.
This week, Robert S. Keebler, principal of Keebler & Associates, a financial planning firm, offered a tax management primer to financial advisers who subscribe to Investment News. He emphasized that there are no hard and fast rules -- every retirees' situation is different. But he offered some basics about organizing accounts that could help anyone who is living in retirement or in their 50s and facing that prospect in a few years.
Here are some of his tips:
- Be prepared for tax increases in 2013. The current tax rates on long-term gains and qualified dividends are due to expire at the end of 2012. In 2013, the tax rate on long-term gains is scheduled to rise to 20 percent -- or 10 percent if a taxpayer is in the 15 percent or lower tax bracket. Also next year, there is no difference between ordinary and qualified dividends. All dividends will be subject to ordinary income tax. And on top of this bad news, beginning in 2013 -- unless the Supreme Court throws out health care reform -- all capital gains income will be subject to an additional 3.8 percent Medicare tax. Of course, given that this is an election year, all bets are off. But if you have a choice, 2012 could be a great year to sell.
- Start considering how you are going to distribute your money early. Some effective strategies take years to put in place, so it's smart to start thinking about this when you are 55 years old, or 10 years away from retirement.
- Consider the Roth IRA or 401(k). Whether a Roth individual retirement account makes sense for you is heavily dependent on your tax bracket while you're working and after you've retired. But a Roth can help you shield assets that trigger the highest tax rates. So look at moving assets that will face substantial taxation into a Roth while keeping more tax-friendly investments in taxable accounts.
- Spend from taxable accounts first. For instance, if you need to pull $30,000 a year from your savings in order to pay the bills, don't pull it all out of cash accounts that will be taxed at rates on top of what you've made from pensions and Social Security. Pull as much of the money as you can out of places that won't push you into a higher tax bracket.
- Don't dismiss whole or universal life insurance. Sometimes these policies can help you shelter money you won't need early in your retirement while offering rates of return that are as good as what you might make elsewhere. And if you never need this money, it will pass untaxed to your heirs.
- Consider alternative investments. Putting your money in real estate, oil and gas, for instance, can protect you from taxation and give you a very nice return.