These 3 Tools Can Save Help You Save On Taxes In Retirement

As you start to withdraw money from your investment accounts in retirement, you're going to end up paying anywhere from zero to 37% in taxes just based on today's tax rates. So today I want to talk about tax diversification and the three tax buckets that are going to be most important in your retirement. First I'd like to introduce myself. My name is Warren Berger. I'm the owner of luminary financial advisors. We help set up plans for people that are nearing retirement or recently retirement that have an emphasis on tax planning and lowering your taxes throughout your retirement. But there are three tax buckets that we have to withdraw from in retirement. The first one is our tax deferred bucket. So that's going to be your 401k or your IRA 403 B these kinds of things that are tax deferred, that you will pay ordinary income taxes on.

Now, as we sit here today in 2022 that will range anywhere from 10% to 37%, depending on which tax bracket you fall into. The second bucket is our tax free bucket. That could be a Roth IRA tax free, just like it sounds, you're not going to pay any taxes on money coming in. The money that was put in there in the first place was after tax money. And then the third bucket is our taxable investments. These are things that are in a brokerage account, things like that, and that's tax to capital gain. So that can range in today's tax rates anywhere from zero to 20%. And so when I talk about tax diversification, it's really about having different assets in each one of these different tax buckets that you can draw from to make the most of each of those individual tax brackets.

Having these different tax buckets allows you to have flexibility as you enter into retirement. So you can take advantage of the different tax rates at different points of your retirement to try to mitigate taxes as you go along. So the rule of thumb in the past would be to take your taxable account money first and then move on to your tax free money and looking to defer as much as you could and leaving that deferred money, 401k money, IRA, money to be taken out last. And the thought process was that you would defer paying taxes for as long as you possibly could. The problem with that is that you lose flexibility. Once you get to age 72 at age 72, you have to take required minimum distributions. And so at that point, the government is saying, Hey, even if you haven't been taking money out of these accounts, we need for you to take at least a certain amount of money out what'll happen.

Oftentimes is that people can get pushed into a higher tax bracket because they're forced to take out maybe more money than they necessarily need as part of their financial plan, but they are forced through out of these RMDs and being in that higher tax bracket can have knock on effects for other aspects of your retirement, such as Medicare. If you get pushed into a higher tax bracket, it could affect the premiums that you pay on Medicare. And so, we want to be really cognizant about which buckets we draw from. As we start to do a withdrawal strategy in retirement, for example, you might want to do Roth conversions. And in

Order to do that, you're going to be paying more in terms of the, your ordinary income tax that you'd be taking as you convert your IRA over to your Roth. So, you may want to do a combination of using your IRA, the tax deferred money that you're going to pay ordinary income taxes on with some combination of potential tax free from a Roth or a taxable account where you have capital gains and now, you're financial professional. Your CPA is going to be able to help you work through that. But the, the idea is just that you have a certain amount of flexibility to be able to take advantage of the different tax brackets by mitigating the tax that you're going to pay this year, but also setting yourself up for success in the future, by moving these funds over to a tax-free mechanism. So that's just one example. And I think sometimes you'll find advisors they're really focused on the investment piece of what's going on, but it's not just about investment.

It's about looking at the totality of your financial situation and taxes are a big piece of that, especially in retirement. So, you really want to make sure not only are you maximizing your investment portfolio, but that you're utilizing it in a way that's going to comport with the objectives that you have throughout your retirement. One of those being mitigating taxes. So I hope this is something that's helpful for you. Just the idea of thinking about this tax diversification. It's something that generally has to start well before retirement, at least sort of five years before retirement. If you don't already have these buckets created there's a lot of ways to get there. So if you would like to talk about your financial situation, please feel free to reach out. I have a link below to set up a complimentary conversation with me. I've also included some links for some helpful checklists and flow charts that can help you get your head around some of these retirement issues that we talk about in these videos. If you have thought this video was helpful, please like the video or subscribe. And I hope to see you here again soon. Thank you.