They say you should never let the tax tail wag the dog, but why pay more in taxes than you need to. Enter, taking some time to plan your income streams during retirement; wherein, a little planning regarding your income sources can save you a lot in taxes.

Some new retirees may not be aware that their social security benefits can be subject to increasing levels of taxation and that they may need to file quarterly tax payments. Moreover, some folks may not be aware that if their income rises too high during retirement that up to 85% or their social security benefit can be subject to taxation. Maybe then a little tax planning is in order.

With that thought in mind, generally, investors would prefer to have three sources to draw from during retirement: taxable accounts (e.g., brokerage accounts), tax-deferred accounts (e.g., traditional IRAs and 401k accounts), and tax-free accounts (e.g., a Roth IRA). By utilizing these three different accounts at different times, one can best control their tax liability,

For example, some folks may enter retirement in a low tax bracket, so generally withdrawing from tax-deferred accounts and taxable accounts will minimize their tax liability when their income is lowest (while also reducing future RMD tax liability). Since a married couple can report up to $77K in 2018 income while still remaining in the 12% tax bracket, it can be advantageous to use this income bracket for taxable and tax-deferred account income. For other folks who may enter retirement with high income levels (e.g., due to pension income and/or rental income streams) and anticipate that they will drop over time, they may wish to consider using their tax-free accounts if they still require additional income (thereby, avoiding taxation at their highest marginal rate).

Remember though, that everyone’s tax situation is different and that you should check with a qualified tax professional to see if these tax strategies would work for you. The key is though, a little advance planning about your anticipated income streams can reduce the amount of taxes that you pay.

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