Don’t Ignore These 3 Critical Tax & Legacy Planning Issues Before Retirement



If you’re on the glide path to retirement, you’ve done all you can to accumulate the capital you’ll need to provide for a potentially secure financial future. Not to diminish all the hard work put into raising retirement capital but, in terms of your overall retirement plan, we feel the accumulation phase is much easier to plan for than the decumulation phase. That entails planning for the optimum allocation of your assets to work towards potential lifetime income sufficiency while maximizing your financial legacy for your heirs.

There are many moving parts to a retirement income strategy that must be developed with consideration for your current assets, tax circumstances, and life ambitions. It’s not enough to create retirement assets; it’s vital that they be preserved.

Ultimately your financial goals, tax circumstances, and lifestyle needs should drive your retirement income strategy. However, here are three critical issues that can have a significant impact on your ability to create  a potential lifetime income sufficiency and a lasting legacy.

Clearly Define Your Vision of a Secure Retirement

As you prepare to transition into retirement, you’ll be faced with a number of critical decisions. Your framework for making those decisions is based on your long-term goals. The more clearly defined they are, the clearer your decisions will be. Fact-based questions about your financial circumstances and objectives are essential but, equally important are questions about your values, beliefs, and attitudes about money as you consider your life in retirement.

  • What life ambitions do you want to achieve in retirement?
  • How do you see your lifestyle changing, if at all?
  • What are your beliefs and attitudes regarding family, health, security, and service to others? Why are they important to you?
  • Are your beliefs and attitudes about money shared by your family?
  • How important is leaving a family legacy, and why is it important?

With the answers to those questions as a backdrop, you will have a clear view of your life in retirement and how your decisions will impact it.

Optimize Your Guaranteed Income

The more guaranteed income you have, on market conditions to produce the rest. Guaranteed income consists of Social Security benefits, pension benefits, annuity income, or any income received that’s not impacted by market factors, such as interest rates or stock market returns.

From there, you can more realistically determine how much income you will need to draw down from your investment portfolio to fill the gap. That will also guide you in how to properly allocate your assets to create a potentially reliable stream of income while ensuring continued growth and preservation of your assets.

As part of the guaranteed income strategy, you will want to create a source of short-term cash flow, not only as a source of funds in the event of an unexpected expense but also to provide cash flow during periods of market volatility, so you don’t have to sell more securities than you have to for your income needs.

Create a Tax-Efficient Withdrawal Strategy

A potential mistake many retirees make is to neglect the tax implications of withdrawing funds from various accounts. It’s great to have a nicely funded 401(k) plan until it’s time to start taking withdrawals and losing up to 37% of the income to taxes.[i] There may be more tax-efficient ways to allocate your assets to maximize your cash flow.

Generally, there are three types of accounts that can be used as income sources in retirement:

Taxable brokerage account: Income from the sale of securities held long term is taxed at the more favorable capital gains tax rate, as are qualified dividends received.

Tax-deferred (traditional IRA, 401(k), or other employer-sponsored plans): Before-tax funds contributed to these accounts accumulate tax-deferred but are then taxed as ordinary income when withdrawn. Required minimum distributions (RMD) rules apply starting at age 72.

Tax-free (Roth IRA): After-tax funds contributed to these accounts grow tax-free and can be withdrawn tax-free. RMD rules don’t apply.

As you can see, the tax implications of these accounts vary, producing different tax outcomes on money withdrawn. The key is to develop a tax diversification strategy that takes advantage of their different tax treatments to minimize taxation and maximize cash flow. The specific strategy would depend on your income and asset mix before and after retirement, lifestyle goals, and tax circumstances.

If most of your retirement assets are held in a 401(k) or traditional IRA, you could consider a Roth conversion for all or a portion of those funds to create a source of tax-free income. Of course, you will be required to pay ordinary income taxes on the amount converted. Depending on your situation, you could convert smaller amounts over a number of years to avoid being pushed up to the higher tax brackets.

When you address these three critical planning issues, you pour the foundation of your life in retirement with a clear vision, a guaranteed income floor, and minimal interference from the IRS.

Most investors will want to discuss these and other strategies with a financial advisor well-versed in retirement income planning who understands what you want to accomplish in retirement. At URS Advisory, we specialize in helping individuals, couples, families, and business owners on the Treasure Coast and the Palm Beaches create a predictable stream of income from their resources that increases their probability of their wealth lasting well beyond their lifetime. Schedule a call with us today to discuss how a partnership with our firm can increase your own odds of retirement success.


[i] https://taxfoundation.org/2022-tax-brackets/ 29 December 2021