USA Today’s personal finance editor Rodney Brooks has an excellent March 12 piece on “Five Tax Tips for Future Retirees.” Here is the first of three blogs featuring excerpts from that article:
“There are plenty of things we think about when preparing for retirement. Unfortunately, taxes is not usually one of them.
“With a little over a month to go before Tax Day, that could be a problem, according to tax experts and financial planners. Tax planning is an integral part of retirement planning. Not planning for taxes in retirement could be a critical and costly mistake.
“So, here are five tax tips for those
thinking about or getting ready for retirement.
“1. Don’t forget about taxes when you look at the size of that retirement nest egg.
“’We look at our assets on a gross basis, which creates a wealth illusion’, says Robert Fishbein, vice president and corporate counsel at Prudential Financial. ‘Wealth illusion is simply a term used to describe thinking an asset provides more value for retirement than it does’.
“In other words, look at our 401(k), pension or IRA balance with the view that we still have to pay taxes when we start withdrawing.
“Fishbein’s example: Your retirement nest egg is $100,000. You plan to withdraw 3% a year for living expenses, or $3,000. “But if the individual is subject to combined federal and state tax rate of 30%, that $3,000 of income provides $2,100 of after-tax income.”
“’The after-tax amount is what is there for paying for your housing costs, your food, your utilities’, he says.
“2. Diversify your retirement assets by adding a Roth IRA, even if you are close to retirement.
“Diversity does three things, says Fishbein. It creates tax-planning options, gives you the ability to manage your tax liability, and sets up a hedge against future tax increases. With a Roth, contributions are not tax-deductible, but withdrawals are tax-free. Thus, in retirement, the Roth will let you withdraw tax-free money along with your taxable income.
“’It is hard for people to take the action to convert (a traditional IRA) to a Roth and pay a tax to the government before they have to’, he says. ‘But for some of one’s retirement nest egg, it makes sense to convert some of the funds’.”