Your Money Matters_Retirement Plan withdrawals & taxes

CPA services-Your money matters; Retirement money withdrawals & taxes

Most of us know  the importance of retirement savings.  Setting aside monies for use in our retirement is basic common sense.  But where many of us need guidance is withdrawing retirement account monies in the most tax efficient manner.    We all anticipate receiving monies from Social Security or government sponsored entitlement program,  but typically these monies will provide 20 to at most 25% of our spending needs in retirement.  You may not know Social Security income is subject to taxation. The amount of social security income subject to tax requires adding one-half of the social security benefits to our other income amounts (including tax exempt muni bond interest and retirement account benefits).  The sum of one-half of our social security benefits and our other income is known as provisional income. One-half of social security is subject to tax when provisional income exceeds $32,000 for a married couple ($25,000 for a single person).  Eighty five percent of social security is subject to tax when provisional income exceeds $44,000 ($34,000 for a single person).   

What is the most tax efficient means to withdraw monies from our retirement account(s)?   Normally, all monies received from qualified retirement accounts are taxed at regular income tax rates.  The value appreciation inside our qualified retirement account(s) does not receive more favorable capital gains tax treatment.  Because we have a progressive income tax structure (meaning the applicable tax rate rises with each incremental retirement dollar withdrawal) the more we withdraw from our retirement accounts the greater the taxes on these additional withdrawals.  The information described in the paragraph above showed an increasing rate of tax on social security income as monies are withdrawn from our retirement accounts.

Solution – Work with our firm to create a complete PLAN for retirement account withdrawals,  including planning for social security/other government retirement accounts (example –PERA).  We want you  to take advantage of every lower income tax bracket, and the maximum provisional income without unnecessary taxation on social security income.  The income distribution PLAN must also address liquidity, and possible reductions of principal if retirement spending needs increase (due to medical or long term care requirements).

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