Tax Planning for Retirement, Part 1: The Golden Decade of Tax Planning Opportunity

By Johnny Roland, CFP®, EA

I will be posting a three-part series over the coming months about how Aspire Planning Associates does tax planning for our clients leading up to and including early retirement. The three parts will be:

  1. The Golden Decade of Tax Planning Opportunity
  2. Understanding Taxation During Retirement
  3. What is Taxable Income? A Reminder

Once-in-a-Lifetime Opportunity

Aspire has been fortunate to have quite a few clients who have retired in the past two to three years, and as we have worked with them through this major life transition, we have been able to identify the unique tax planning opportunities that their retirement provides.

I call the “Golden Decade of Tax Planning” the period between age 60 and 70. Why do I call it the Golden Decade? Because if you retire in your early 60s, you have a once-in-a-lifetime opportunity to do proactive tax planning before you reach age 70 that can potentially reduce your future lifetime income taxes by tens of thousands of dollars!

You will be in that rare period of your life when you are not working and earning an income and when other uncontrollable income has not kicked in yet. I will explain what I mean by “uncontrollable income” in my next blog post, but for now, it is essentially income that once it starts, you can’t stop it or really control the amount. One example would be a required minimum distribution (RMD) from your retirement plan—which is all taxable as regular income, of course.

8 Unique Factors

What are the factors behind the Golden Decade opportunity?

  • You can take retirement plan distributions starting at age 59-1/2 without a 10% tax penalty, so we can fine-tune what you take and not worry about tax penalties.
  • RMDs from retirement plans don’t start until age 70-1/2, so you can let your retirement assets grow as we tap other sources of income.
  • You can delay Social Security until age 70. Delaying has the benefit of not only reducing taxable income but also allowing your benefits to grow.
  • Once you retire, your income usually drops dramatically. Suddenly, your taxable income is now in brackets that you only saw decades ago when you started working.
  • If your taxable income is low enough, you can harvest long-term capital gains at 0%. Yes, you really can harvest long-term capital gains without paying any taxes.
  • Reducing your IRA balances during the Golden Decade will reduce your future required minimum distributions. This has the benefit of reducing future taxable income.
  • You can build up your Roth IRA balances to create more flexibility in your future retirement “paychecks.” Having larger Roth retirement balances means you can tap that income with no income taxes ever. Your Roth accounts can then become perfect emergency or splurge accounts.
  • You may even be eligible for Obamacare tax credits before you qualify for Medicare at age 65. Yes, this is a possibility as long as your income remains under 400% of the federal poverty level for your household size.

Now, even if you don’t retire early in your 60s, you still have opportunities. They may be over a shorter period, but we can still help you structure your accounts and income to pay a bit more in taxes now to avoid paying more in the future.

Yes, there are a lot of moving pieces to consider, but opportunities abound if you know how the pieces fit together. That’s what makes this 10-year period so challenging and interesting. And it is a chance you may never get again during your lifetime!

Now, a word of disclaimer: Keep in mind that tax laws change, tax brackets change, and assumptions about the future are just that—assumptions. The challenge is to take advantage of the tax planning opportunities available in the short to medium term without betting your entire strategy on assumptions that may change in the long term.