Tax Planning for Retirement: Topics for Your Next Tax Meeting

As we move into tax season and everyone starts scheduling their annual sit-down with their advisors, tax planning for retirement needs to be part of the conversation. That’s true even for workers who are years away from retirement. Crafting multi-year plans allows you to grow your retirement savings in the most tax-advantaged ways possible. And it can be a big weight off your shoulders to leave your annual tax meeting with your financial planners knowing that your tax and retirement plans are in good shape. 

What Should You Be Discussing With Your Advisors Around Retirement Tax Planning? 

Like other elements of financial planning, tax planning around retirement is highly individualized. There’s a great deal of complex calculus that goes into determining whether a particular strategy is advisable for an investor’s specific needs. This is why it’s a good idea to work with financial advisors with deep tax knowledge, who can explain the big-picture implications of various decisions and provide tax-advantaged guidance. 

While retirement tax planning is individualized, there are a few common subjects that advisors and investors tend to speak about. Elements that might be part of the conversation include:

• Roth conversions. A common question investors discuss with their advisors leading up to retirement is, does it make sense to convert a 401(k) or traditional IRA to a Roth IRA? Converting to a Roth allows you to take tax-free withdrawals in retirement without required minimum distributions. Individuals tend to start to think about Roth conversions in their 50s or 60s, but there can be circumstances in which it makes sense for younger investors to convert to a Roth account. 

• How to time asset withdrawal. Another thing to discuss with your advisor is, what’s the most tax-advantaged timeline for pulling assets out of your retirement funds? For some people in lower tax brackets, it can make sense to tap into those funds before they have to start taking required minimum distributions. In other cases, advisors will recommend waiting to withdraw assets until you have to take RMDs. 

• Health savings accounts. Pairing a high deductible health plan with a health savings account has become an increasingly popular strategy for retirement planning in recent years. A health savings account provides triple tax advantages: Contributions can be made with pre-tax dollars, money grows tax-free and withdrawals aren’t taxed as long as they’re used for qualified medical expenses. (And there are no income limits associated with opening an HSA, making this an attractive savings option for people who earn too much to qualify to make Roth contributions.) You can use the money in your HSA to pay for medical care now if you need to. But if you can let the money grow mostly untouched and make the maximum contributions, an HSA can essentially function like an extra retirement plan after you retire. Take tax-free withdrawals to pay for Medicare expenses or hold onto the money in case you need to pay for nursing home or long-term care. Any unused money left in your HSA can be transferred to your heirs through your estate plan.

• Stock option planning. If you’ve been granted stock options or restricted stock, you don’t want to wait until you’re ready to retire to start strategizing. There should be a multi-year plan in place to exercise and sell any company stock you’ve been granted, and to manage the tax implications of selling stock. Retiring executives may walk away from lucrative stock options by accident because they failed to plan ahead. It’s a very expensive and very avoidable mistake.

• Tax-advantaged investment strategies. As you talk about asset allocation with your advisors, tax impact should always be weighed heavily. You don’t want to adjust your portfolio without knowing what kind of taxes you’re being exposed to and, as a result, how your retirement savings may be affected. There are a number of retirement-focused investment strategies that a savvy advisor might suggest. For example, for some investors it makes sense to invest in municipal bonds. They can be tax-free at both the federal and state level, and they tend to be a relatively safe investment vehicle for people approaching retirement. Advisors may also be able to help investors get greater returns in retirement by doing things like putting bonds in tax-deferred or tax-free accounts, or by using tools like hedge funds to control their tax burden.  

Because your savings and investment decisions always overlap with tax planning, it’s important to work with CPAs and other financial advisors who have strong tax knowledge. They can help you understand the long-term implications of any decisions you make around investments, taxes and retirement. You wouldn’t jump into a body of water without knowing what’s under the surface, and you shouldn’t jump into an attractive investment opportunity without knowing what kind of taxes you’re opening yourself up to.

The financial advisors and CPAs at Sachetta, LLC always put a tax overlay on the investment management guidance we provide our clients. We examine the pros, cons and possible tax outcomes of every move our clients consider, helping them make decisions that support both their investment goals and retirement plans. And we make the process as easy and pleasant as possible. As we look forward to another busy tax season, contact me today. 

Stephen P. Ahern, CPA/PFS, CFP®, AEP®, MST

Stephen is a licensed Certified Public Accountant (CPA), a Certified Financial Planner™ practitioner (CFP®) and has been designated a Personal Financial Specialist (PFS) by the American Institute of Certified Public Accountants. He has achieved the Accredited Estate Planner® (AEP®) designation from the National Association of Estate Planners & Councils (NAEPC) and is a Registered Financial “Fee-Only” Advisor with the National Association of Personal Financial Advisors (NAPFA). Stephen also earned a Master of Science degree in Taxation (MST) from Bentley University and completed graduate studies in the Program for Financial Planners at Boston University.  He provides individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients including key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs.