Tax Saving Income Tips

When you finally retire, it is important to have a financial strategy in place that will protect the fruit of your hard work and make sure that you get the most out of your golden years. One of the most critical parts of your financial plan is how you will draw money from your retirement accounts. Conventional wisdom says it is best to begin spending your taxable accounts first, so that your tax deferred and tax free retirement accounts have more time to grow. But in the new economy, with lower interest rates and smaller nest eggs, there is a better strategy. By tapping all of your accounts simultaneously and by deferring your Social Security, you can reduce the tax bracket you are in and keep Uncle Sam's hands off a significant amount of your money. In fact, it is possible to use the Tax Code to make your portfolio last up to seven years longer. To demonstrate this strategy, consider a couple who decide to retire at 62 with $1 million in assets. These assets consist of $700,000 in a regular IRA and $300,000 in a taxable account. The first step is for them to put off claiming Social Security. This will increase their future benefits and reduce the amount of those benefits that will be subject to tax. Next, the couple should withdraw about $70,000 annually from the taxable account for living expenses. This will allow them to stay in the low end of the federal income tax bracket of 15%, and, at this rate, the account will support them for about 4 years. Each year they should take advantage of the low tax bracket and also withdraw $70,000 from their tax deferred IRA and convert it to a Roth IRA. There, the money will be able to grow, tax free. Finally, after four years, as the taxable account reaches its end, the couple should begin taking Social Security. But what has this approach accomplished? Because they are now 66 years old, they will qualify for a combined $44,000 in Social Security, which is 33% more than they would have received at 62. The formula that determines how much of an individual's Social Security is taxable counts only half of the person's Social Security income. So, in contrast with a regular IRA, you can receive twice as much Social Security income before you ever trigger a tax on your benefits. Finally, because money has been moved from a tax deferred IRA to a tax free Roth IRA, when distributions begin, the taxable income that they create will be lower. The withdrawals from the Roth account can supplement income in years in which tapping other accounts would push them into a higher tax bracket. Given the present financial environment, it is especially important to use the tax code wisely. With a little planning, it is possible to save large amounts of money and protect what you have earned. If the fog is lifting and you want to know more, simply click the link on your screen.