Tax Management at Retirement

During your retirement years, it’s really important that you pay close attention to the income tax consequences of your investment decisions. You need to think about this, because if you have a lot of investment income when you’re retired, you may find that your Social Security benefits have been pushed into the taxable column. What’s more, if you’ve accumulated a lot of investment income in a tax-deferred retirement plan and you don’t manage the distributions, you could wind up in a much higher tax bracket with required minimum distributions (RMDs) after age 70½.

Regarding Social Security, a lot of people don’t realize that benefits are taxable once you exceed certain income levels. But it’s true—benefits could be subject to tax if half of your benefits plus all of your other income exceeds a certain base amount for your filing status. What’s that other income? Taxable pensions, wages, interest, dividends—basically, it’s all of your other taxable income. Once your Social Security benefits wind up in the tax column, you could ultimately pay tax on up to 85% of them, depending on your filing status and the amount that you go over the base figure.

So what can you do about this? A good start might be to reduce the amount of taxable income that you earn from your investments, because investment income is included in your gross income. This may help decrease your modified adjusted gross income, which, in turn, can help reduce or eliminate taxation of your Social Security benefits. One strategy you might consider is investing your personal money in growth stocks or mutual funds that have the potential to appreciate rather than pay dividends.

If your retirement assets are such that you could be pushed into a higher tax bracket after age 70½, you may want to withdraw or convert a portion of your retirement plan money annually once you retire (or at any time after age 59½) instead of waiting until age 70½. This way, you could potentially be able to prevent a tax bracket problem later on. Of course, the challenge is trying to figure out precisely how much money you should withdraw each year. This kind of calculation is fairly detailed, but it’s an important one. Give us a call here at Lucia Capital Group, and we can go over the numbers with you. As always, we’re here to help.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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