September 28, 2022
  • September 28, 2022

How Proactive Tax Planning Can Save Your Retirement

By on April 23, 2022 0

If I were to ask you how much you’ve saved in your IRA, 401(k), or similar retirement plan, I guess you could be pretty close to telling me your current account balance.

But what if I asked you how much you can expect to pay in taxes on that money throughout your retirement? You would probably have no idea.

And that’s not unusual. Americans often make the mistake of focusing too narrowly on their account’s investment returns while paying little attention to tax planning.

Many people have no idea how much of the money in their tax-deferred retirement accounts really belongs to them and how much money might end up going to Uncle Sam. Either they forget that the IRS will eventually by taking its share through income taxes, or they are seriously underestimating the importance of this amount.

The scary truth is that retiring without a solid tax plan in place could needlessly cost you tens of thousands of dollars, or even hundreds of thousands. I liken it to heating and cooling your home with the windows wide open: you can do it, but it will be expensive.

Tax Preparation vs. Tax Planning

The lesson here is to be informed about what is and is not tax planning.

Many Americans file their taxes each year with a tax preparation service, or CPA. During this process, they can receive good advice and find some deductions. But essentially what they do is record what happened in the past. Saving big bucks on taxes throughout retirement requires looking forward, not back.

Tax preparation and tax planning are not the same thing. Without proper tax planning, your retirement savings could be extremely vulnerable, especially if tax rates rise in the future.

No one can predict exactly what will happen to taxes in the coming years, but many experts have suggested that in order for the government to meet its obligations, it will at some point be forced to raise tax rates. In 2018, the nonpartisan Congressional Budget Office went so far as to call the federal budget “frightening and almost certainly unsustainable.”

When the CBO released this grim outlook, our national debt was approaching $22 trillion. Today it stands at over $30 trillion and there is still no clear plan for repayment.

What can you do to prepare for potential tax headwinds? Here are some strategies to consider.

Minimize taxes on your social security benefits

Did you know that up to 85% of your Social Security benefits could end up being taxed as ordinary income?

Many people don’t even know they might have to pay taxes on their Social Security payments. But if your combined income (adjusted gross income + non-taxable interest + half of your Social Security benefits = combined income) is above the IRS limits, you may have to pay at least some tax – up to 50 % or even 85% (the IRS has a calculator that can help you determine how much of your Social Security benefits are taxable).

A solid income plan should consider the impact of taxes on your retirement income and provide you with a clear plan of how much to withdraw from which account and when to minimize tax risk.

Consider the benefits of a Roth conversion

If you’ve put most of your retirement savings in a tax-deferred investment account, converting all or a large portion of those funds to a Roth IRA could help reduce the tax bill that awaits you. retirement. Paying taxes at today’s historically low rates and converting to Roth allows for tax-free growth and retirement income.

If you and your financial adviser agree that converting to a Roth makes sense, you have until the end of 2025 to take advantage of the tax cuts introduced by the Tax Cuts and Jobs Act of 2017 (you can make a Roth conversion after that time, but the taxes you pay are likely to be higher).

Plan now for your surviving spouse

When one of the spouses dies, the tax status of the survivor quickly changes to that of single filer. In the future, this means that he will face a lower income threshold for the calculation of income tax.

Your retirement plan should include strategies designed to deal with this inevitability, possibly including a life insurance policy (which is not taxed when a lump sum payment is made to a spouse). ROTH IRAs could also significantly reduce the tax impact upon the death of the first spouse, as there are no required minimum distributions from the inherited ROTH IRA.

Avoid tax risks with a plan

When designing your retirement plan, keep in mind that you and your heirs will have to pay taxes on every dollar you have saved in what I call “tax deferral” accounts.

You can defer paying taxes on the money you contribute and earn in a traditional IRA or 401(k), but ultimately those taxes have to be paid.

If you’re focused on saving and investing, but are a little fuzzy about the problems your tax bills might cause in retirement, a qualified financial advisor can help you plan your taxes proactively.

Remember, it’s not the amount of money you’ve saved that matters the most. Rather, it is the part of that money that you keep, use and enjoy during a long retirement.

Kim Franke-Folstad contributed to this article.

Founder, CEO, David Lukas Financial

David Lukas is the founder and CEO of Arkansas-based David Lukas Financial ( He is also the host of “The David Lukas Show” (, which was named one of the Top 100 Financial Shows in the United States, according to Nielsen Ratings. David holds the National Social Security Advisor Certificate (NSSA®).

The appearances in Kiplinger were obtained through a public relations program. The columnist received help from a public relations firm to prepare this article for submission to Kiplinger was not compensated in any way.