Creating a Tax Strategy for a New Retiree
Retirement is the most significant objective that clients discuss with advisers during their professional relationship. One critical component is how taxes are paid. Creating a strategy simplifies this remarkable change for your clients.
Financial advisors, unlike tax advisors, don’t have to go too deeply into the waters of tax planning. Instead, they can adopt a high-level approach, providing value to the clients’ financial lives and directing them on the right path.
Let’s look at one hypothetical example. Assume our customer is a single woman who works as a program manager for a Fortune 500 company and earns $300,000 per year with no additional sources of income. We will discuss federal taxes because state taxes vary significantly across the country.
That’s a significant change.
The move from a job to retirement income will be the most significant change in a client’s financial life. For most of her working life, she had been accustomed to getting reliable biweekly payments from her job. Regardless of the strategy employed to replace it, that’ll be a significant adjustment.
Tax withholding was practically an afterthought in those bi-weekly payments. Each check had federal taxes deducted, and this was basically never discussed at semi-annual meetings.
During a mid-year assessment, the client announced that she would be retiring in three months. It’s now time to begin developing a tax plan that suits her requirements.
New income tax bracket
A new tax bracket has to be estimated because she’s no longer earning a steady $300,000 per year. That’s a two-step process. First, we need to determine how much total income she’ll receive, including pension income and Social Security retirement payments (this income might have different tax treatment). Then we compare that figure to her spending requirements. We’ll take the larger of the two figures.
The client’s annual income decreased from $300,000 to $100,000 due to her expenses. Based on the 2022 tax table, her federal tax bracket dropped from 35% to 24%. Her flexibility within that bracket enables her to earn an extra $70,050 in ordinary income before pushing up to the next bracket.
Now we can begin new discussions and devise new strategies. Depending on various factors, we can consider Roth conversions or further eligible withdrawals to mitigate the impact of large RMDs in the future.
Putting a strategy into action
After doing the legwork and making sure the client understands how their taxes will alter in retirement, we can determine how to pay taxes proactively.
The most straightforward answer is to describe the importance of distribution withholdings. We’ve discussed our client’s expected yearly income, and we have a good idea of their federal tax bracket. We may then make an educated choice on how the withholding should be structured. We may recommend withholding 15-20% on the federal level for customers with $100,000 in regular income in 2022.
It’s ultimately up to you how far you want to go with tax preparation. If the client has an ongoing relationship with their CPA, the tax expert will be delighted to have a discussion now that will make things simpler for them come tax season.
Financial advisors will be viewed as offering enormous value as long as we’re proactive in high-level tax planning and encourage engagement with a client’s CPA.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Joe Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
