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Tax Wise Retirement Planning

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(ARA) — When it comes to retirement planning, most of us spend a lot of time determining the best investment strategies with the highest rates of return. Often, considerably less attention is paid to how much of that investment return we’ll actually get to keep. Tax planning as a component of retirement distribution planning is essential, and according to a new report by Prudential Financial, Inc., the traditional approach to tapping retirement assets might not yield the highest tax savings.

The study, Tax-Wise Retirement Distribution Planning, outlines several alternative distribution options using a hypothetical couple in various scenarios to contrast and compare results. The findings provide ample reason to review your own retirement plan and consider the tax ramification of different distribution models, to determine what works best for you.

Some points to consider:
Does the Traditional Plan Fit Your Needs?
The popular school of thought regarding accessing retirement assets is fairly straightforward: access taxable accounts (such as taxable savings accounts) first, partially tax-deferred assets (like stocks or mutual funds) second and tax-deferred accounts (like IRAs, annuities or qualified retirement plans) last. Whether this model works for you is determined by many variables, but the first step in outlining any plan is narrowing down your goals.

Asset Longevity Versus Wealth Transfer: You Decide
Most people have a general goal in retirement: to have enough money to live comfortably for the duration of their lives, and hopefully have some left over to pass on to future generations. But a tax-wise retirement plan needs to drill down into more specific aspirations. Your financial professional can help you determine what your target after-tax income is (including Social Security benefits) and whether your primary goal is asset longevity, wealth transfer or some combination of the two, and then develop income distribution strategies that best meet those needs. How and when you are taxed on your distributions can significantly impact both of these goals, and a well-strategized plan can minimize surprises later.

Where are Your Assets?
After reviewing your goals, you will need to determine how much of your assets are in taxable savings, and what the tax basis is for your other holdings. Next, you will need to look at your retirement goals: At what age do you and/or your spouse hope to retire? When do you expect to begin taking Social Security payments? And will you or your spouse continue to work after retirement? All of these decisions will influence your tax planning strategies. For example, if you or your spouse continues to work for several years after retiring at age 65, you could consider delaying Social Security payments until age 67, and instead tap into personal assets earlier. This will not only increase the amount of the Social Security benefit, it could potentially reduce the amount of income tax paid (working increases the portion of Social Security benefit subject to income tax, and therefore must be factored into your long-term goals).

Supplement Retirement Income with an Annuity
An Individual Retirement Annuity with a lifetime annual payout can help insure you against poor returns on other investments, and help protect you against the risk of outliving the other assets in your financial plan. As with every other potential scenario, there are many personal variables, but in general, the combination of delaying Social Security and purchasing an annuity can be a powerful planning solution to help manage longevity and investment return risks. Unfortunately, there is no one-size-fits-all solution for the retirement planning issues raised by the distribution phase. Most individuals will need professional support to determine the distribution plan that will unlock tax liabilities and maximize their retirement assets for themselves and their heirs. Meeting with a qualified financial professional now can help you map out your intentions and keep retirement distribution options from becoming a taxing matter in the future.

To learn more about Tax-Wise Retirement Distribution Planning, visit

Courtesy of ARA Content