Tax Efficient Retirement Withdrawal Strategies –PillarWM
Working with the right expert can help you explore more opportunities to enhance your after-tax income in retirement, particularly if your funds are spread over numerous account types, such as Roth accounts, regular retirement accounts, and taxable savings such as savings or brokerage accounts. Although, determining which accounts to draw from and when can be a difficult task. That is why many people choose to implement tax efficient retirement withdrawal strategies that help them retain as much of their money as possible. Financial planning is essential if you’re planning to invest more than 5 million dollars. If you would like to read professional insights into managing the wealth of high earners, you can request our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Finding the right advisor to help you with your retirement plan can be daunting. High-net-worth and ultra-high-net-worth individuals benefit the most by working with wealth management firms. Wealth managers at Pillar Wealth Management are experts in a multitude of financial aspects, including retirement planning, giving effective investment advice, and providing customized wealth management solutions for clients looking to invest 5 million to 500 million dollars. If you are interested in sitting down with an expert from our team for a chat, you can book a free consultation through our website.
In this article, we will cover a few tax efficient retirement withdrawal strategies while answering questions such as, “How do I pay fewer taxes on retirement withdrawals?”,“What retirement money should you spend first?” and“What percentage can I withdraw for retirement?” Keep reading to learn more.
Table of Contents
Table of Contents
What are Taxable, Tax-Deferred, and Tax-Exempt Accounts?
Before we get into tax efficient retirement withdrawal strategies and answering your concerns regarding“How do I pay fewer taxes on retirement withdrawals?” we will discuss taxable, tax-deferred, and tax-exempt accounts.
Taxable accounts can be individual or joint accounts that are funded with after-tax money. If an investment made in a taxable account is held for less than a year, the investor has to pay capital gains tax on any increase in the investment income. These include assets such as bonds, stocks, and mutual funds. A taxable account allows you to deposit and withdraw funds without any limits, fines, or restrictions. In some cases, you can even benefit from a lower long-term capital gains tax rate.
Tax-deferred accounts include Traditional 401(k), Traditional IRA, and Qualified Tax-Deferred Annuity, and are funded with pre-tax, earned income. They allow earnings from investments to accumulate tax-free until the investor has constructive receipt of the earnings. Then, the investor will need to pay income tax on the amount they withdraw at that time. For tax-deferred accounts, required minimum distributions start at the age of 70.
Tax-exempt accounts are funded with post-tax, earned income and include Roth 401(k) and Roth IRA. They allow you to accumulate earnings from investments such as dividends, interest, or capital gains tax-free. In order to be exempt from income tax at the time of withdrawal, the investor must hold the account for a minimum of 5 years and should be above 59 years old. Since any withdrawal is not reported for income, they can help reduce your Social Security taxes.
Keeping track of your taxes and investments can be overwhelming and confusing. If you would like to read insights into high earners can effectively manage their wealth, you should consider requesting a copy of our book,7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million.
Other Income Sources
Investors with a solid retirement plan have carefully analyzed their options and the variety of income sources available to them. Planning early increases your chances of ensuring a financially secure and stress-free retirement. Wealth managers are experts in retirement planning and tax management. If you would like to consult with someone from our team for professional advice on your retirement plan, feel free to schedule a meeting with us.
After you retire, you rely heavily on your savings and passive income sources for your various expenses. These can include any rental income, business income, life insurances, reverse mortgages, tax-deferred annuities, or health savings accounts.
What to Keep in Mind When Withdrawing from Your Retirement Accounts
If you’re wondering, “What percentage can I withdraw for retirement?” you should consider the fact that your expenses as a high-net-worth or ultra-high-net-worth investor might be significantly higher than the average investor.
Traditionally, the 4-percent rule is considered a safe withdrawal rate. This follows that you can withdraw approximately 4 percent of your principal every year while annually adjusting the amount to account for inflation. However, it does not account for the taxes you’ll have to pay, whether your portfolio performs well or not, or how your expenses can fluctuate every year. If you want to gain an accurate estimate of your after-tax income, you can consult with a financial professional.
While many people think that delaying withdrawals from your IRA accounts until you’re above 70 years old can reduce your taxes, there is another point to consider. Many investors can increase their after-tax income by withdrawing early from their IRA and delaying the start date of their Social Security. When they start receiving benefits from Social Security, they can reduce the amount they withdraw from their retirement accounts.
Hence, the 4-percent rule can be used as a starting point and a basic guideline for determining how much money to put down for retirement. However, we recommend creating a specific spending rate based on your individual circumstances, assets, and risk tolerance and then revising it on a regular basis. This will also help you in identifying the appropriate tax efficient retirement withdrawal strategies to use.
Wealth managers can use strategies to optimize your investment portfolio to generate more profits at a lower risk. If you’re interested in learning about how we achieve this, you can read our exclusive 5 critical shifts guide.
What is the Traditional Approach?
A valid question that any investor would have is, “What retirement money should you spend first?” One approach to this is the traditional approach, where you withdraw money from one account at a time, starting with your taxable accounts, then your tax-deferred accounts, and lastly, your Roth accounts.
This strategy allows your tax-advantaged accounts to expand tax-deferred for longer, but it may result in higher taxable income in some years than in others. Because your tax rate is determined by your earnings, you may end up paying more taxes in high-income years than you planned.
What are Proportional Withdrawals?
Many investors with large taxable capital gains can use the proportional approaches as one of the more tax efficient retirement withdrawal strategies. Proportional withdrawals allow you to take assets from all your accounts every year in proportion to your total retirement savings.This technique spreads out the tax burden and decreases it significantly, prolonging the portfolio’s life.
Everyone’s financial goals in retirement are different, but if you’re worried about outliving your assets, you might concentrate on extending the life of your portfolio and increasing your retirement spending power. Fortunately, investment managers can help you achieve this by improving your portfolio performance. If you would like to read more into the strategies used to increase portfolio performance, you can read our Performance Guide.
If you’re wondering, “How do I pay fewer taxes on retirement withdrawals?” you can consider tax-loss harvesting strategies. In this method, you can sell securities that are under performing in your regular investment account, which is known as tax-loss harvesting. Taxes on your 401(k) distribution are offset by the losses on the securities, reducing your tax burden.
Our wealth managers are experts in advising you on tax-loss harvesting and wealth protection. You can read our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million, to learn how we can help safeguard your assets.
Advanced Tax Bracket Management
Taking a longer tax planning approach and attempting to identify lower tax rate years earlier in retirement where your assets can be converted from tax-deferred to tax-exempt is a more sophisticated tax bracket management method.From the age of 59 and a half, you can attempt to maximize your taxable income to the top of the 15% tax bracket and contribute it to a Roth IRA.
This allows you to grow and withdraw your savings tax-free. However, since this is an advanced tax efficient retirement withdrawal strategy, it is better if done through a professional financial planner. Working with a wealth manager can help you identify your retirement goals and tax-saving strategies that help you retain your income. If you would like to learn more about our services, feel free to schedule a chat with one of our wealth managers.
Bucket Your Investments
If you bucket your investments, you can manage the risk of being forced to sell into a downturn. The first bucket suggests that you allocate a year’s worth of spending in a savings or checking account. The second bucket suggests that you allocate 2 to 4 years of spending in low volatility investments that produce an income. Lastly, you invest your long-term assets for growth and income generation.
Opting for Tax-Efficient Investments
If you have held certain securities for less than a year, which have the potential to generate gains, aim to hold them for more than a year to benefit from long-term capital gains tax rates. This is assuming that the investment still aligns with your long-term objectives. Moreover, in years when tax rates are lower, you can consider accelerating your taxable income and capital gains.
It is important to understand which investment is tax-efficient in which type of account. For example, tax-efficient investments can be held in any account, but tax-inefficient assets are more suitable for a tax-free or a tax-deferred account.
Who Can Help You with Tax Efficient Retirement Withdrawal Strategies?
Financial professionals are skilled and qualified to implement the correct tax efficient retirement withdrawal strategies that suit your financial situation. Tax advisors, tax attorneys, as well as retirement planners and financial planners can offer you insights into how you should manage your taxes regarding your retirement plan, estate plan, and financial plan.
Wealth managers offer a holistic array of services, including retirement planning, estate planning, tax management, and investment management. They understand the specific goals and requirement of high-net-worth investors. If you would like to read about how we help high earners with their wealth management, you can request our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
While this isn’t a comprehensive list of all thetax efficient retirement withdrawal strategies you can use, these are a few examples of the methods that professional can use to reduce your tax burden. Wealth managers at Pillar Wealth Management are experts in using tax-saving strategies and performance-boosting strategies to help you protect and grow your wealth. We offer fiduciary, fee-only services to clients who want to invest 5 million to 500 million dollars. Schedule a free consultation with us to get to know how we can improve your financial management.
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