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"A Goal Without a Plan Is Just a Wish"
-Antoine de Saint-Exupery


Will My Taxes Go Down in Retirement?

That’s a very common assumption that many people make. Based on the idea that taxes will go down over time, they decide to take as little as possible from retirement accounts and spend their taxable money first. For some people that works fine, but for many it becomes a tax trap.

Often when you first retire, your tax rate drops dramatically but then, over time, begins to creep back up. Why is that? Because social security goes up every year and the amount of money you have to take out of your retirement savings goes up every year - until they start to deplete. The rules about required minimum distributions say that every year you must take out an increasing percentage of your retirement funds.

 This pushes people into higher and higher tax brackets. Worse case scenario is when one spouse dies and they lose one social security benefit and the tax rate goes up as well. This happens because the surviving spouse now has to file as a single taxpayer at much higher rates for the same withdrawal amount from an IRA.

What you need is a plan to get your money in the most tax efficient way. Your goal should not be to maximize dollars but to maximize after tax dollars that are spendable or giftable. It is often better to take some money out of retirement accounts early and save some of the taxable money for later. If you have heirs, this has the added benefit of great estate planning efficiency because the taxable assets get the step up in basis at death and the first $5.5 million passes tax free while IRA assets are fully taxable to heirs at regular income tax rates.

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