The years leading up to retirement are frequently filled with a number of opportunities to minimize taxes that, if not implemented, can never be recaptured. Unfortunately, many people wait until one or two years before retirement before getting serious about retirement planning, only to later regret their delay.
While there’s nothing magic about a 10-year time frame, we like to use that as a starting point to emphasize that this is about being very forward-looking, and not just considering the current or upcoming year. Though we do tend to find that this is especially valuable during the last 5 years or so before retirement, regardless of what life stage you are currently in, long-term tax planning may provide benefits to both you and your family that can last well into the future.
Are You Missing Out?
In our opinion, tax minimization opportunities may be missed because of the relatively narrow focus of different professionals. Tax preparers (e.g. Certified Public Accountants, or CPAs) may not necessarily collect all information regarding your assets, liabilities, retirement goals, and future projected needs. Additionally, investment managers who focus primarily on investments may not necessarily look at all the variables of your comprehensive financial situation.
However, all these different variables are generally essential when developing strategies aimed at minimizing taxes. As a result, many tax preparers and investment managers do not provide the type of advanced planning required to take advantage of the different tax strategies available.
Take A Team Approach to Your Wealth Management
We believe the solution to capitalizing on opportunities to minimize taxes requires a team approach:
- Have a knowledgeable professional prepare your taxes, whether this person is you, or a CPA who ideally also has a background in financial planning
- Engage a wealth manager or team who is knowledgeable on tax minimization strategies, who collects information on your assets, liabilities, retirement goals, and future projected needs. This person/team should make forecasts using reasonable assumptions that uncover potential opportunities and current weaknesses
Once these individuals are identified, they should help you to develop and implement a strategic financial overview (see next page) that incorporates tax minimization strategies for at least the next 10 years. They should also help you monitor your financial overview on an ongoing basis and update it at least annually to account for your changing financial situation and new opportunities. When this is done in coordination with one’s tax preparer, powerful strategies designed to minimize taxes may be effectively employed on a consistent basis.
Create A Financial Overview
What do we mean by “financial overview”? A financial overview is ultimately a plan (in document form), both comprehensive and consistent, which should include the following:
- Assets
- Liabilities
- All pre-retirement income sources
- Future charitable intentions
- Projected future retirement income, including: Social Security, pensions, investment income, business and rental income, and part-time work
- Retirement plan contribution opportunities, including: Health Savings Accounts, Flexible Spending Accounts, work retirement accounts, IRAs and Roth IRAs, non-qualified accounts, and other applicable investment options
- Estate planning variables, including: Asset titling, beneficiary designations, potential uses of trusts, life insurance, business continuity, etc.
Each of these areas can have major tax implications, either for better or for worse. Whether you maintain this financial overview yourself or employ a financial professional, it is important that the person doing the maintenance is trained in identifying tax minimization strategies so that valuable opportunities are less likely to be lost.
Update Your Plan Annually … Or When Life Happens
Once your financial overview is in place, it is important to revisit the plan annually, and to modify it as necessary, as life situations change. An annual tax analysis is important since tax laws change, income needs can often vary from one year to the next, and there are a number of significant age-based circum- stances that you will likely encounter throughout your lifetime. Some of the many occurrences that may change with time that will likely affect your tax strategy include:
- Desired retirement date
- Health insurance changes at retirement and at age 65 when Medicare becomes available
- Claiming Social Security
- Starting required minimum distributions
- Changing tax laws and income tax rates
- Charitable giving
- Receiving inheritances
- Paying off a mortgage
- Retirement plan contribution limits and availability
- Special one-time purchases for new vehicles, vacation home purchases, home improvement, children’s weddings, grandchildren’s education, etc.
- The purchase or sale of a business
- Pension eligibility and benefit levels
- Conversion opportunities from IRAs to Roth IRAs
Final Considerations For Your Plan
If you are like many retirees, taxes will be one of your largest expenses throughout your retirement. Having an experienced team monitoring your net worth, income streams, and changing tax laws while adjusting your long-term tax strategies accordingly can play a significant role in your net worth and spendable income. If you are within 5 years of retirement, we would strongly urge you to get a second opinion on your current tax strategy. Many wealth managers will provide you with a second opinion on a complimentary basis.
Don’t be one of the many who regret missed tax opportunities. Start developing your long-term tax minimization strategy as soon as you can.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.