Planning your income during retirement requires focusing on the different tax characteristics of your assets and income sources. If you aren’t careful, your tax liabilities could be higher than you anticipated, leaving you with much less money than you expected during a time you need it the most.Rather than letting your tax liabilities reduce your retirement income, consider these strategies for taxes in retirement.

Taxable Income During Retirement

Everyone has different sources of income, but some of the most common taxable income sources during retirement include:

• Social Security
• Pre-tax IRA funds
• 401K withdrawals
• Pensions
• Inherited IRA withdrawals
• Annuities
• Interest
• Dividends
• Capital gains
• Passive income from sources like real estate

The only income that likely won’t incur a tax liability is income from a Roth IRA or 401K. As long as you’ve owned the account for at least five years and withdraw funds after age 59 ½, your withdrawals are tax-free.All other sources of income discussed above, though, will incur tax liabilities. So how do you strategically receive income during retirement to reduce your tax liabilities?

Minimizing Taxes During Retirement

To minimize your taxes in retirement, here are a few strategies.

Social Security Claiming Strategy

Avoiding taxes on your Social Security income is legal, but it requires careful planning. The only way to avoid paying taxes on Social Security is to ensure your combined annual income doesn’t exceed $25,000 if you’re filing single and $32,000 if you’re married filing jointly.To determine your combined annual income, you must consider the following:

• Adjusted gross income from any earnings except Social Security
• Tax-exempt interest income
• 50% of your Social Security income

If you can keep your income lower than $25,000 or $32,000, whichever applies to you, then your social security benefit is not taxed.You will pay income tax on the following portion of your benefits once your income exceeds those amounts:

• 50% of your benefit if income is between $25,000 – $34,000 if you’re filing single or $32,000 – $44,000 for married filing jointly.
• 85% of your benefit if your income is above $34,000 if filing single and $44,000 if married filing jointly.

To manage this, try to limit how much you withdraw from taxable retirement accounts or wait to take your Social Security income until you’ve hit the years when your other income is lower.

Diversify your Investments into Different Tax Buckets

When you invest for retirement, you have different avenues you can take. Not everything must go into an IRA or 401k. If you want to lower your tax burden during retirement, consider Roth accounts if your income isn’t too high to qualify for it. The limits are $138,000 for single filers and $218,000 for married filing jointly couples to contribute the full amount allowed. As you go above those amounts, the amount you can contribute to a Roth IRA decreases, phasing out completely at $153,000 and $228,000 respectively.When you have Roth accounts, you can withdraw when you want because you’ve already paid the taxes due on the income. Don’t forget about taxable brokerage accounts. These accounts offer liquidity, flexibility and different tax characteristics than Roth and Traditional retirement accounts.

It’s important to have your retirement funds in different tax buckets so you aren’t stuck with Required Minimum Distributions and paying large amounts of tax when you can least afford it.

Focus on Long-Term Capital Gains

Try keeping your investment gains to only be taxed at long-term capital gain rates. All this required is holding an investment for more than 1-year before selling it at a gain. Short-term capital gains are taxed at ordinary income rates based on your current taxable income, but long-term capital gains are taxed at preferential lower rates, saving you money.

Consider Roth Conversions

If your income exceeds the limits to contribute to a Roth account, or you didn’t consider it when you opened your retirement account, consider a Roth conversion.With a Roth conversion, you convert your existing traditional retirement account to a Roth account to get tax benefits and avoid RMDs. When you convert, you pay taxes on the income today but can withdraw contributions and earnings tax-free during retirement.While you’ll pay a lump sum for the taxes owed today, you won’t pay taxes in retirement, which diversifies your income and allows you to avoid excessive taxation during retirement. Roth conversions should be strategically timed to ideally be done in years that you are in a lower tax bracket than when you made the tax deductible retirement contribution.

Tax Efficient Investing

Tax-efficient investing is just as it sounds – owning specific types of investments in the most appropriate account in order to reduce tax implications. Rather than losing a large portion of your earnings to taxes, learn how to minimize your taxes and maximize your earnings.While there’s no guarantee how investments will perform, the following strategies can help minimize your tax liabilities during retirement.

For example, in taxable accounts, consider holding:

• Stocks you own for more than a year to take advantage of long-term capital gains, which are usually taxed at a lower rate than short-term capital gains
• High growth potential investments
• ETFs and index funds that limit capital gain distributions
• Investments that pay qualified dividends
• Municipal bonds

In tax-advantaged accounts, consider the following:

• Income oriented investments
• High growth potential investments (in Roth accounts)
• Actively managed funds
• Taxable bond funds
• REITs

Strategize your Retirement Account Withdrawals

To minimize your tax liabilities in retirement, you need to strategically choose what accounts you take withdrawals from and when.Traditional retirement accounts require you to withdraw a minimum amount of money annually starting at age 73. This is to ensure you pay taxes on the funds you deferred. However, before then, you can withdraw funds how you please.Following your RMD – Required Minimum Distribution – you can supplement any additional income needs from taxable accounts followed by tax-free accounts. If you have not yet reached the age for RMD’s then you may consider drawing first from taxable accounts, followed by tax-deferred accounts then tax free. You want to try timing your tax-deferred withdrawals for the years that you are in the lowest tax bracket.

Final Thoughts

Planning your taxes in retirement is just as important as saving money for retirement. If you’re not careful, your taxes could overtake your earnings, leaving you with much less than anticipated in retirement.Instead, strategize your tax plans during retirement so you don’t have any unpleasant surprises or are left without the funds you need. Diversifying your accounts, withdrawing from funds that tax the least, and carefully withdrawing funds from taxable accounts during years when you’re in a lower tax bracket are the best ways to ensure you have maximum earnings and the lowest tax burdens during retirement.

The SECURE 2.0 Act made many changes to retirement savings, making it easier and more motivating for people to save for retirement.Some changes are immediate, and others occur in the next couple of years. Here’s how the SECURE 2.0 Act may help you.

What is the Secure 2.0 Act?

The SECURE 2.0 Act became law in late 2022, making many changes to the current SECURE Act, which was signed in 2019. The SECURE Act rules how you can save (and use) your retirement funds.The SECURE 2.0 Act made changes to retirement and savings rules to make the rules more flexible and potentially make it easier to save for retirement.Almost everyone will be affected by the changes. Here are the most significant changes.

Required Minimum Distribution Changes

The RMD changes increased the age that you must take the required minimum distributions from traditional IRAs from 72 to 73. This means you can wait until April 1 of the year after you turn 73 to take your first distribution. From there, you must always take a distribution by December 31 of each year.Another change is the penalty charged for not taking RMDs. Individuals will now pay 25% of the undistributed funds rather than the previous 50% penalty. The delay in RMDs allows you more time to grow your funds tax-deferred. It also allows more time to do Roth conversions if you’re eligible to convert your traditional IRA to a Roth IRA for more tax savings.However, there’s a downside. You will need other assets to supplement your income while you aren’t withdrawing funds from your retirement account. So it requires more careful financial planning to make it happen.

Roth Contribution Limits

Before the SECURE 2.0 Act, employees didn’t have the option to have employer-matching contributions sent to their Roth plan. However, the new plan allows individuals to choose this option giving more tax-free income during retirement.If you choose to send your employer contributions to your Roth account, they will become a part of your taxable income because Roth contributions are after-tax. The SECURE 2.0 Act also eliminates RMDs for workplace Roth accounts, but this begins in 2024.

Higher Catch-Up Contributions

Before the SECURE 2.0 Act, people aged 50 and older could only contribute an additional $1,000 to their retirement account annually. With the new laws, catch-up contributions increase starting in 2025 to $10,000 or 50 percent of the standard catch-up amount, whichever is greater. This applies to anyone ages 60 – 63 years old.Also, all catch-up contributions will be after-tax, so you won’t get the tax benefits when you contribute unless you earn $145,000 or less yearly.These changes will increase the ability to save by deferring more money for retirement. It may also decrease your tax bracket by deferring more funds to retirement if you make $145,000 or less per year.

Auto Enrollment in 401Ks

As of right now, employers can offer automatic enrollment in their 401K plan, but they aren’t required to do so. With automatic enrollment, employees are automatically enrolled in the company’s 401K unless they opt-out.The SECURE 2.0 Act ensures that all major employers must have automatic enrollment in their 401K plan.Companies can automatically defer the amount between 3 – 10% of each employee’s income. Employees aren’t required to participate, but it may increase the number of people who participate and save for retirement. Being automatically enrolled eliminates the extra step required to sign up for the company’s 401K. More employees may be willing to save for retirement when it’s done for them.Certain companies are excluded from this law, including companies with fewer than ten employees and those in business for fewer than ten years.

529 Rollovers to Roth IRA

Typically, any 529 savings plan funds not used can be withdrawn and used for other purposes but face a 10% penalty plus income taxes. However, in 2024, you can roll over your unused 529 funds into a Roth IRA.There are a few provisions, though.You can roll over up to $35,000 in your lifetime and only funds in a 529 plan for at least 15 years. The funds must also be rolled over into a Roth IRA in the same name as the beneficiary of the 529 savings plan funds.Any funds deposited in the last five years and any earnings on those funds cannot be rolled over, and the rollover amount must fall in line with the current year’s IRA contribution limits.This new law motivates more people to use the 529 plan, getting the state income tax deduction (if applicable) and the ability to get tax-free funds through conversion in the future.

Retirement Plan Contributions for Employees with Student Loans

Many employees with student loans forgo the 401K contributions to pay off their student debt. However, the SECURE 2.0 Act allows employers to contribute to employees’ 401K accounts with student loan debt, even if they don’t make contributions.The amount an employer can contribute equals the amount of student loan debt the employee repaid that year.This new law allows employees to save for retirement and eliminate student debt. It’s a win-win for employees.

Final Thoughts

The SECURE 2.0 Act offers motivation and opportunities for more people to save for retirement. With an increased age for RMDs, a larger amount for catch-up contributions, higher Roth contribution limits, and the ability to roll over 529 savings into a Roth IRA, saving for retirement are more accessible.The new changes make it easier to save for retirement, allowing more people to enter their golden years with enough money to last their lifetime. The changes are gradual, and not every change will affect everyone, but most people are affected in some way by the new changes.

We are just coming out of an unprecedented time in history after massive disruptions in just about every facet of our lives due to the Covid-19 pandemic. While it appears things are finally back to near normal, most of us would be wise to take an extra close look at our retirement plans in 2023 to ensure we are on the best path forward.Most of the stock market roared to new highs in the second half of 2020 and 2021 as much of the world leaned on technology to do everything from attending work meetings virtually to ordering groceries and restaurant meals while preserving social distancing. This greatly benefited certain parts of the stock market.

Since then, much of the stock market has returned to Earth while the world economy deals with supply chain issues, high inflation, rising interest rates, a war in Eastern Europe and fear of a pending global recession.Taking everything into account, investors should not only take a close look at their retirement portfolios in the coming year but also be aware of law changes that will drastically impact the planning landscape.Investors must make sure they are properly allocated and have the necessary cash available to both weather oncoming storms and take advantage of potential opportunities, while being aware of changes to social security, retirement contributions, tax brackets and Medicare.

Changes to Social Security

The federal government recently announced an 8.7% hike in social security. While this is good news, it is in large part due to the increased rate of inflation that we have experienced, meaning the “real” effect is much smaller if your total spending has also risen.

Due to the increase, an average benefit check will increase around $140 to $1,827 a month, compared with the typical benefit of $1,681 in 2022. 

Those currently drawing on their retirement savings may need to make an adjustment to their withdrawal rate. If spending has not increased commensurate with the rate of inflation then the increase in social security may allow for a decrease in portfolio withdrawals, allowing more money to remain invested.

IRMAA Adjustment

There is also an adjustment to the Medicare Income-Related Monthly Adjustment Amount (IRMAA), which is the amount you may pay in addition to your Part B or Part D premium if your income is above a certain level.In 2023, surcharges for Medicare Part B range from an extra $65.90 per month to $395.60 per month per person on top of the standard Part B premium of $164.90 per month. While these numbers are not insignificant, they are actually slightly down from 2022 premium and surcharge levels.

Keep in mind that the Social Security Administration (SSA) determines if you owe any IRMAA based on the income you reported on your IRS tax return two years prior, meaning the income reported in 2021 will determine if and how much IRMAA is owed.IRMAA related planning can have a significant impact on your health costs in retirement.

Tax Bracket Changes

While tax brackets aren’t changing, the incomes associated with each tax bracket are increasing for 2023. For example, a married couple in the 22% marginal tax bracket can earn up to $190,750 in 2023 before moving into the next bracket, an increase of $12,600 from 2022 income thresholds.

 How does this impact taxpayers?

• Tax bills may be lower assuming equal income
• Withholding may need to be adjusted, providing higher monthly cash flow
• Increased opportunity for Roth conversions before crossing into a higher bracket
• Ability to earn more without moving into a higher marginal bracket

Review your expected 2023 income to see if you need to make any adjustments to your income and conversion plan.

Take Advantage of Contribution Limit Increases. 

As we know, one of the best assets investors have is time, which allows for compounding. For those nearing retirement, it is especially important to make sure that your portfolio is properly allocated to not take on losses right before or in the early years of retirement.Recessions and bear markets are a natural part of the economic and investment cycle, albeit uncomfortable as they occur. If you are nearing retirement or already retired, keeping cash on hand to cover living expenses is especially important during periods of volatility and a potential recession and market downturn.

However, if you are nearing retirement then you still have the opportunity to continue saving and invest in the market at lower prices. The years leading up to retirement are a great time to be maxing out retirement contributions and taking advantage of the catch-up contribution.

 Here is a list of retirement contribution changes for 2023: 

• IRA contribution limit increased to $6,500
  • Catch up contribution for those over 50 remains the same at $1,000
• 401(k) employee contribution limit increased to $22,500
  • Catch up contribution for those over 50 increases to $7,500
• Income thresholds for Roth IRA contributions or deductible Traditional IRA contributions increased
• SEP IRA contribution increased to $66,000

Maximizing retirement contributions is one of the most important steps one can take to save for retirement and plan current and future taxes.

Proper Asset Allocation in a Volatile Market 

Proper asset allocation is always important, especially in a volatile market. As disciplined, long-term investors, our philosophy is that the allocation among different asset classes should not change due to temporary market conditions. Timing the market by sliding in and out of the investment at the perfect time has proven to be a fool’s errand over and over. Remaining steadfast in a well planned strategy tends to work out much better.The primary driver when deciding on a proper allocation of assets depends largely on when money will be needed. If you are close to retirement, your best portfolio looks much different than it would have looked decades prior.

In 2023 we know we are facing high inflation and a potential recession. Our best strategy is to build a diversified portfolio of funds that stretch across sectors, market capitalization, and geographic locations with a proper mix of stocks, bonds, and cash.Generally speaking, we recommend rebalancing the portfolio at most every quarter to take advantage of the ebbs and flows of this volatile market. There is no reason to make drastic, extraordinary changes to a portfolio based on temporary market swings due to volatility, especially if there are some low risk assets in your portfolio, as we advise everyone.

Higher Interest Rates Present an Opportunity

The higher interest rates are having a huge impact on retirement plans as well. The higher rates make it much more difficult for companies to earn a profit leading to a shrinking stock market.However, for those in or near retirement, higher rates are not necessarily bad. It will be easier to generate a guaranteed income with a portion of your retirement assets. For years, savings and CD interest rates have been practically zero in many cases, but going forward, it will be easier to earn a decent return with those assets. Those with certain types of life insurance or annuities are likely to be pleasantly surprised by higher future dividends.

While 2023 will be a year full of uncertainty as we deal with the waning pandemic, high inflation, and rising rates, it is important to remember it is just one year in a very long game. Successful investors keep their focus on the long-term, understanding that there will be difficult periods to weather.If you are nearing retirement or just want to ensure you are as prepared as possible for what may come, now would be an excellent time to make and implement a solid plan for your financial future.

A job change can be an exciting time. Hopefully your switch was for good reasons such as a promotion, a higher salary, more upward potential, increased responsibilities, a reduced commute. The list could go on.

And even if it was for unexpected reasons, there is still a lot of change occurring.

But once you say goodbye to your former colleagues, pack up your things and head out the door, there is still one major decision that must not be forgotten…

What to do with your 401(k)!

You have several options when determining what to do with your old 401(k):

1.Leave your 401(k) where it is -Offers less flexibility and most people forget to pay attention to their account
2.Rollover your 401(k) to a new retirement account-Most often your best option for numerous reasons
3.Cash out your 401(k) plan–Avoid this option if possible due to negative tax consequences!

What Is A 401(k) Rollover?

A 401(k) rollover is when you request a direct transfer out of your old 401(k) plan to an IRA or your new 401(k). You will need to check with your new 401(k) provider to see if they accept rollover contributions. Not all do.

When you request a 401(k) rollover, all of your investments will be sold and converted to cash. You cannot transfer the investments “in-kind” in a 401(k)-rollover transaction.

Some 401(k) plans may be able to transfer the funds electronically directly to the new custodian where you want the money going. However, in many cases the 401(k) administrator will issue a check made payable to the new retirement account but sent to you, which you then have to forward along to the new account custodian.

Be aware of the 60-day rollover period! If your old 401(k) administrator issues you a check then you must take responsibility and send those funds to your IRA account within 60 days from the date the check was issued in order to avoid any taxation. If you miss this 60-day window, then you will incur federal and state income tax on the entire traditional 401(k) portion and potentially an additional 10% penalty if you do not meet other requirements.

Tax Implications Of A 401(k) Rollover

Assuming that you rollover your old 401(k) into an IRA or to your 401(k) plan with your new employer then there are no tax implications. This is a transfer from one tax-deferred account to another, allowing the money to be reinvested and continue to benefit from tax-deferred growth.

If you had different types of contributions into your old 401(k), such as pre-tax, Roth, or after-tax contributions, then you must be sure that you transfer each type of contribution to the appropriate account. This is to ensure that the account is treated appropriately once you do start withdrawing funds in retirement.

For example, Roth 401(k) contributions need to be rolled over into a Roth IRA or Roth 401(k). After-tax contributions should be rolled into a separate account for contribution tracking purposes.

Again, if you receive a check when going through the rollover process then be sure to satisfy the 60-day rollover requirement to avoid taxation. The importance of this cannot be stated enough.

Benefits of a 401(k) Rollover

There are many variables to consider when deciding what to do with your old 401(k). Here are 4 benefits of rolling over your plan to an IRA.

1.Increased investment options. Most 401(k) plans have a limited menu of investment options –typically in the range of 20-30 investments. The quality of these investments and the fees associated with each fund can vary greatly from plan to plan. When you rollover your 401(k) into an IRA you open yourself up to a much larger investment universe and therefore the potential to achieve better returns.

2.Simplify your life. Do not burden yourself later in life by trying to figure out where you have old 401(k) accounts and how to access those funds. By rolling over your 401(k) account you will have less accounts to worry about and you will have your assets in fewer locations,making it easier to stay up-to-date on your portfolio strategy. This also has the potential to boost investment returns since you will not have any old accounts sit stagnant and ignored.

3.Reduce fees. Your 401(k) may have fees that you are not even aware of. This includes fees such as account maintenance fees, administrative fees, potentially higher fund expenses and perhaps even a fee to a 401(k) advisor who you no longer get to benefit from by not being an active participant. You may not even be aware of these fees depending on how they are reported, but you can be certain that they are there.

4.Continue to contribute to the new account. Once you leave your employer, you are no longer able to contribute to the 401(k) if you leave it where it is. Therefore, the account will not benefit from future contributions. Taking your account with you to an active retirement account where you can continue to contribute, such as an IRA or new 401(k), allows you to continue making contributions.

Avoid Cashing Out Your 401(k)

It might be tempting to cash out your 401(k) and use that money. Unless you are in a serious financial situation where you need the money for very good reasons, it is best to avoid this option.

Not only will you owe federal & state income tax on the entire amount that is cashed out of a traditional 401(k), but you may also owe an additional 10% penalty depending on your specific situation. That means taxes and fees could add up to over 40% in some situations!

Most importantly, by cashing out of your 401(k) are foregoing two of the greatest benefits of retirement accounts: time and tax deferred compound growth. These two forces can make your money multiply significantly! Do not interrupt them!

Additional Considerations

401(k) plans are customizable by the employer and therefore each plan may have different characteristics. That is why it is important to understand the following:

1.Will your old 401(k) plan even allow you to keep your account there after you are no longer with the company?
2.Will your new 401(k) plan allow for rollover contributions?
3.Are the investment options in your new 401(k) plan any good?
4.Do you have the time and desire to personally manage your investment portfolio in an IRA or should you seek professional assistance?
5.Do you have employer stock in your old 401(k) plan? This requires much more planning as to the most appropriate strategy.Every persons situation is different and therefore there is no one size fits all answer. Rolling over your 401(k) to an IRA has many benefits, as discussed here, but the decision requires thoughtful analysis and consideration.

Final Thoughts

Do not take this decision lightly. There are a lot of factors to consider and there is a lot on the line with this decision. But not making any decision at all and simply forgetting about your account and letting it sit dormant for years could turn out to be one of the worst decisions.

If the thought of all of this overwhelms you then seek professional guidance. A financial advisor can assist you in analyzing this decision and facilitating the process. Additionally, an advisor will help you manage the Rollover IRA account if this is not something you have the time or interest in taking on yourself.Schedule a call today to discuss how to best navigate your old 401(k) options.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved