866-832-1173
Blog
Contact Us
Client Center
FREE GUIDE
FREE GUIDE DOWNLOAD

Lower Your Taxes in Retirement With These Effective Strategies

Picture of Ty Bernicke, CFP® | President & CEO

Ty Bernicke, CFP® | President & CEO

In this video, Ty Bernicke, CFP®, President & CEO, discusses effective tax minimization strategies for retirement, emphasizing the importance of understanding different income sources and investment types. Learn how to optimize your tax buckets—tax-deferred, tax-free, and non-qualified—to maximize your retirement savings and minimize tax liabilities.

Hello everybody! My name is Ty Bernicke, and I’m going to be talking with you about lowering taxes in retirement with some different effective tax minimization strategies. When you’re tax planning for retirement, it’s really important to look at the collective total of all the different income sources that you might have in retirement, including pension income, Social Security income, if you’re going to be working part-time or if you still have business ownership interest, that will factor into play.

The Importance of Investment Tax Implications

 

Of course, investments have tax implications as well. The first thing that I want to start off by going over is to help you understand a few variables that will affect the strategies that we’re going to be talking about in a little bit. Imagine for a second if you had to take all the investments that you own and that people in the general public own and you had to place them into three different buckets.

The Three Investment Buckets

Tax-Deferred Bucket

The first one we’ll call the tax-deferred bucket, which includes things like IRAs, 401(k)s, 403(b)s, and 457(b) plans. Many of you won’t have all of these types of plans, but you might have one or a few of them. When you put money into this bucket, it gets put in on a pre-tax or a tax-deductible basis, which means that saves you money in taxes in the year you put money into that bucket. The money grows on a tax-deferred basis. When you pull it out, generally speaking, 100% of that money when you’re withdrawing it in retirement to supplement your income is going to be subject to income tax if you take it out for qualified reasons. If you take it out for unqualified reasons, you might even have to pay a penalty on top of that. You will have to take money out of this at some point. Depending on your date of birth, you might have to start taking money out at age 73 or as late as age 75 because eventually the government wants to get some of the taxes that they haven’t collected from this pocket at some point in time. That’s why you have those required minimum distributions.
 

Tax-Free Bucket

The second bucket is what we call the tax-free bucket, which could include things like Roth IRAs, Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s. Again, many of you won’t have all of those different categories of investments that you can place your money into, but some of you might have one or two. When you put money into this bucket, generally it doesn’t give you any immediate tax relief or significant tax relief at the onset. But in this bucket, money grows tax-free. If you take it out for qualified reasons, it can be withdrawn income tax-free. You can even leave it to your beneficiaries who can also withdraw that money income tax-free. Once the money’s in there it’s permanently protected from taxes but you don’t get any tax benefit up front like you do with that tax-deferred bucket.
 

Non-Qualified Bucket

The final bucket is what we call the non-qualified bucket. Depending on the types of investments that you own in this bucket, those investments can be taxed differently. If you own stocks or mutual funds that invest in stocks, chances are you will have annual dividends and may have gains distributions. Or when you sell those securities, you might have a taxable capital gain. Fortunately, the tax rates on those are more attractive than ordinary income tax rates. If you own municipal bonds, you might not have to pay federal taxes; depending on the state you reside in, you might not have to pay any state income tax on those municipal bonds either. So they can be quite tax-efficient. However, they do create other tax complications that can make them less effective and the interest rates typically aren’t as competitive as other types of bonds. If you do own corporate bonds or government bonds, they’re fully subject to ordinary income tax rates and tend to be very tax inefficient when owned in this market.
 

Actively managed mutual funds can also be very tax inefficient in this bucket. Balance mutual funds that have a mixture of stocks and bonds can be very tax inefficient as well. There actually is something that you can find through a company called Morningstar that discloses the tax cost ratio of certain types of investments. It’s not uncommon to see many mutual funds with a tax cost ratio of 1.5%. 1.5% essentially means that if you made 8% before tax, after taxes you’d only make 6.5% because 1.5% of that is going to pay the tax man at the end of the year.

Illustrating Tax Cost Impact

 

In this example, I made this to help illustrate over the course of retirement how important it is to keep that tax cost ratio at a reasonable level. Assuming we started with a $500,000 investment that had a 1.5% tax cost ratio and assuming that investment grew at 8% for 30 years, this is the amount of money you’d have if you simply did a different investment that grew at the same rate but had a slightly lower tax cost ratio. You can see it makes a big difference in the bottom line—approximately $700,000 over a 30-year time horizon.

Importance of Investment Placement

 

So again, I wanted to help illustrate why it’s so important to own the right types of investments in the non-qualified market; it can have a very meaningful impact over the course of your retirement.If you’re looking for personalized advice or would like more information about optimizing your retirement strategy, feel free to reach out!

Have retirement questions?

Schedule a quick 15-minute call with one of our financial advisors to discuss your most pressing questions related to retirement: bernicke.com/consultations

You can also reach us directly at (866) 832-1173.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Picture of Ty Bernicke, CFP® | President & CEO

Ty Bernicke, CFP® | President & CEO

Ty Bernicke is the President and CEO Bernicke Wealth Management. Ty currently works with a limited number of clients that require wealth and/or investment management services. His research on investment management, retirement planning, and tax minimization strategies have been published or recognized by The Wall Street Journal, Forbes, The New York Times, Futures Magazine, and many other well-known national and international publications. Ty Bernicke and Bernicke Wealth Management give back to the community and environment through numerous charitable endeavors. Ty spends his free time with his wife, two daughters, and one son. He also likes to fish, golf, and exercise.

Schedule a Quick 15-Minute Call

Email | Facebook | LinkedIn

All Posts

Schedule a Quick 15-Minute Call

"*" indicates required fields

Step 1 of 3

Learn why you may be able to retire earlier than you think.

"*" indicates required fields

This field is hidden when viewing the form
This field is hidden when viewing the form
This field is for validation purposes and should be left unchanged.

Learn why you may be able to retire earlier than you think.

"*" indicates required fields

This field is hidden when viewing the form
This field is hidden when viewing the form
This field is for validation purposes and should be left unchanged.