Maximize Your Retirement Savings: Understanding Taxes for a Secure Future

When planning for retirement, many individuals focus primarily on how much they have saved. However, an equally important aspect often overlooked is understanding how much they will owe in taxes during retirement. According to financial advisors Ryan Thacker and Tyson Thacker, “If you don’t know how much you’ll owe in taxes on your savings and investments, you really don’t know how much you have to spend in retirement.”

The Importance of Knowing Your Tax Liability

The Thacker brothers, who have assisted over 50,000 families in the Wasatch Front with retirement planning, emphasize that many people underestimate the taxes they will incur once they retire. Tyson highlights that retirement income typically originates from multiple sources, including IRAs, 401(k)s, Social Security, and other investments such as real estate and dividends, all of which are taxed differently. Without a well-structured tax strategy, retirees could end up overpaying taxes by tens of thousands of dollars annually.

Why Smart Tax Planning Pays Off in Retirement

While many associate tax responsibilities with April 15, waiting until tax season can lead to missed opportunities for savings. “When you file your taxes each April, you’re simply reporting past income,” explains Tyson. “To minimize taxes in retirement, proactive tax planning is essential. This could result in significant savings not just for a year, but for your entire retirement.”

Interestingly, current tax rates are among the lowest seen in 40 years, a situation bolstered by the Trump-era tax cuts. However, with the national debt surpassing $38 trillion, experts warn that it is not a matter of if taxes will rise, but when. The Thackers urge their clients to seize strategic tax planning opportunities now that could lead to considerable tax savings down the line.

Understanding the Most Taxed Accounts in Retirement

For many, a sizable portion of retirement savings is held in traditional IRAs or 401(k)s. It’s crucial to remember that any withdrawals from these accounts will be taxed as ordinary income. Ryan Thacker notes, “Your IRAs and 401(k)s are effectively IOUs to the IRS.” Without a coordinated strategy for withdrawing from these accounts alongside Social Security and other investments, retirees risk significant overpayment in taxes.

To mitigate this, the Thackers often advocate for converting portions of traditional IRAs and 401(k)s into Roth IRAs. This conversion allows taxes to be paid at current rates while protecting future earnings from taxation. “By converting to a Roth, you can significantly reduce your overall tax burden for the rest of your life,” Tyson explains. Roths also escape required minimum distributions (RMDs), granting retirees greater control over their tax implications.

Navigating Social Security and the ‘Tax Torpedo’

Another key concern for retirees is how Social Security benefits are taxed. In some cases, up to 85% of these benefits may be subject to taxation. Tyson warns that combining Social Security with withdrawals from IRAs or 401(k)s could create a scenario known as the ‘Tax Torpedo,’ where increased income raises the taxation of benefits, Medicare premiums, and impacts deductions or credits.

To effectively manage this, Ryan suggests taking a strategic approach to withdrawals. Coordinating between IRA withdrawals, timing for Social Security, and Roth conversions can significantly reduce or eliminate tax liabilities from benefits.

Recognizing Other Taxable Income Sources in Retirement

It’s essential to acknowledge that almost every source of retirement income can carry its own tax implications. Common taxable income sources include:

• Dividends and Investments: Qualified dividends are taxed at capital gains rates (up to 20%), while non-qualified dividends face ordinary income rates, which can reach up to 37%.
• CDs and Money Markets: Interest from these accounts is taxed as ordinary income.
• Annuities and Pensions: While annuities provide lifetime income, qualified annuities are also taxed as ordinary income upon withdrawal, similar to most pensions.

Discover Your Potential Tax Savings in Retirement

If you’ve saved over $300,000 for retirement, it’s likely that you will encounter tax challenges. For individuals looking to explore ways to save on taxes during retirement, B.O.S.S. Retirement Solutions offers a complimentary customized Retirement Tax Analysis. This analysis outlines potential tax liabilities based on your current path compared with strategies that could lead to significant savings.

Ryan emphasizes, “There’s no pressure; it’s your choice to take action. We’ve streamlined the process, making it straightforward, and you might be surprised by how many tax savings opportunities we uncover.” Many clients discover potential six-figure tax savings over their retirement years.

Get Started Today

To schedule your complimentary, customized retirement tax analysis, call (801) 990-5055. Tyson and Ryan Thacker, the leaders of B.O.S.S. Retirement Solutions, are dedicated to helping you achieve a tax-efficient retirement.

This article provides information for illustrative purposes only. Results may vary. For personalized advice, consult with a licensed tax advisor or attorney.

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