Are you overpaying taxes?  Will you end up overpaying in the future?  When it comes to taxes, we’ve been trained to look into the past and try to put together income in the most tax-efficient way possible to help lower our taxes for the current year.  But why try to save hundreds of dollars in a single year when you could save hundreds of thousands or even millions of dollars over your lifetime?  To do so, you must be able to control your tax bracket, and to control your tax bracket, you must be forward-looking when it comes to taxes.  

Reduce Your Lifetime Tax Liability 

The government made a deal with us, and we have two options when it comes to retirement accounts. The best part of the deal is that either option allows for tax-free growth of our investments within the retirement account. Our main decision is whether to pay taxes before contributing to the account or when we withdraw money during retirement.

So, what’s the right answer? That’s like agreeing to a mortgage without knowing the interest rate until the very end—how would you know if you’re overpaying? The same uncertainty applies to retirement accounts. We simply don’t know what future tax rates will be when we go to access those funds. This unknown makes planning difficult—unless you take advantage of advanced tax planning strategies.

With thoughtful planning, you can estimate your future tax situation and take steps to minimize your tax burden. One powerful tool is the Roth Conversion, which, when done systematically leading up to and into retirement, could save you hundreds of thousands of dollars in federal taxes. Better yet, those savings can extend to your heirs, as distributions from inherited Roth IRA accounts are not taxed.

Avoid the "Gotcha" Taxes (IRMAA/NIIT)

When Isaac Newton was hit in the head with an apple and discovered the laws of gravity, he probably never imagined how many Americans would one day feel a similar impact, except from taxes. The gravitational pull of our tax burdens can feel overwhelming at times. When we receive income with one hand, it can often feel like an unexpected tax burden is waiting in the other.

Understanding what triggers these surprise or “gotcha” taxes, such as the Medicare Premium Surcharge or the Net Investment Income Tax, can help us plan ahead and avoid them. With the proper knowledge and foresight, we can dodge these financial hits before they come crashing down on us.

Take Home More Money Throughout Your Retirement

Conventional wisdom tells us to follow a specific order when pulling funds during retirement: taxable, then tax-deferred, and finally tax-free. However, a one-size-fits-all approach doesn’t always lead to the most efficient outcome. By mapping out your expenses and income sources year over year, you can make more strategic decisions about where to recognize income from, maximizing tax efficiency based on your unique situation.

With ever-changing tax laws and the inevitable changes in your and your family’s life circumstances, a phased approach to income planning may be more effective than forcing your situation into a rigid, outdated formula. Flexibility and foresight can help you adapt your strategy to maximize your retirement income.