Navigating Your Retirement Tax Strategy: Sherri’s Journey to Tax Diversification

When planning for retirement, there’s often a lot of focus on growing your nest egg through diversified investments, but what about diversifying your taxes? This is about strategic and long-term tax planning that could lower your tax bill and maximize your retirement income.  

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

We explore the concept of tax diversification, illustrated by the hypothetical scenario of a woman named Sherri who has planned for retirement income and identified that she needs to take $100,000 from her retirement investments to fund her desired lifestyle for one year. Through three scenarios, we see how different distributions from various tax buckets can significantly impact her net spending power. 

Scenario One: Traditional IRA

In this scenario, Sherri draws her entire $100,000 retirement income from a traditional IRA. Since all withdrawals from this account are subject to ordinary income tax, Sherri’s spendable income is reduced to $87,000 after taxes. This method is common due to familiarity with traditional IRAs and 401(k) plans, but as the planners explain, it’s not the most efficient strategy. 

Scenario Two: Introducing Roth Conversions

Here’s where Sherri starts getting creative. Now, she distributes her income between a pre-tax IRA and a Roth IRA – a move made possible by prior Roth conversions. By taking $50,000 from her pre-tax IRA and another $50,000 tax-free from her Roth IRA, Sherri increases her net income to $96,000. This scenario showcases how Roth IRAs can enhance retirement income through tax-free qualified distributions. 

Scenario Three: Tax Diversification

In the third scenario, Sherri maximizes her tax diversification by incorporating a third bucket: non-qualified accounts, which might include brokerage accounts or bank savings. 

She strategically withdraws $30,000 from her pre-tax IRA, $40,000 from her Roth IRA, and $30,000 from her non-qualified accounts. 

This approach leaves her with $98,000 of net spendable income, underscoring the power of strategic planning. 

Each scenario underscores the critical role of planning ahead for tax efficiency. Roth conversions, which allow for transferring funds from a traditional IRA to a Roth IRA while paying taxes in the year you do the conversion, can be a game-changer. This strategy allows for tax-free growth and qualified distributions later, making it particularly attractive for those aiming for financial flexibility in retirement. 

Retirement Planners Loren Merkle and Chawn Honkomp also stress the importance of a long-term tax strategy, distinct from annual tax filings. Instead of focusing solely on minimizing taxes each year, they advise considering how to minimize taxes over the course of your entire retirement. This involves projecting future tax scenarios and potential changes to tax laws that might affect retirement funds. 

Click here to watch the full episode “Three Ways to Lower Taxes in Retirement” on YouTube!

FOLLOW US ON SOCIAL

Visual-Insights-Newsletter-Ad_v2

Sign-up for our Visual Insights Newsletter for the latest retirement information and strategies – straight to your inbox.

  • This field is for validation purposes and should be left unchanged.

Discover more strategies you could be missing out on
Plan Your Taxes in Retirement - Blue TV Set - YouTube Thumbnail Clint Huntrods Retirement Planner

Retirement Strategies | How to Stop Leaving Money on the Table

Don’t leave retirement money on the table due to taxes! We’re diving deep into strategic planning to save you potentially thousands in tax dollars.  – Learn about the whopping $650 billion in tax savings retirees could utilize each year with proper planning.  – Discover why traditional savings accounts, like IRAs and 401(k)s, could be a…

Read More...
Blue background with text "Is Your Income Enough" and headshot of Loren Merkle in a suit

Maximizing Your Social Security | Strategies for a Smart Election

Navigating Social Security benefits can be daunting, especially when you’re on the cusp of retirement. Experienced Retirement Planner Loren Merkle breaks down the complexities to help you maximize Social Security options.  – Explore the difference between taking Social Security early vs. at Full Retirement Age (FRA) and how health and longevity play into this decision. …

Read More...
Blue Background with text "Protect Your Retirement" with headshot of Chawn Honkomp smiling in a suit

Navigating Retirement | A Couple’s $12 Million Lesson

Discover how to navigate the complexities of retirement planning with Retirement Planners Loren Merkle and Chawn Honkomp. Learn key strategies to live comfortably, protect your nest egg, and grow your investments during retirement.  – Understand how to create a comprehensive retirement plan that goes beyond just investment advice.  – Hear how one couple’s intuition prompted…

Read More...
Blue background with text "It's Not That Easy" with headshot of host Molly Nelson smiling in a suit jacket

Retirement Planning | Why It’s Not an Easy Set It and Forget It Scenario

We look at why you can’t simply “set it and forget it” when it comes to retirement planning. We highlight the importance of ongoing maintenance and adjustments to adapt your written plan to life changes and legislative updates.  Covered topics: – The need for ongoing attention to retirement plans  – Implications of legislative changes on…

Read More...
Blue background with text "Where Should I Start?" with headshot of Clint Huntrods smiling in a suit

Navigating Your Financial Future When Your Advisor Retires

Navigating the transition when your financial advisor is heading into retirement can be daunting. Retirement Planners Loren Merkle and Clint Huntrods discuss what steps to take and how to stay on track for retirement.  – Understand the impact of the baby boomer retirement wave on the economy and the financial industry.  – Discover the average…

Read More...
Blue background with text "Get Started Now" with headshot of Loren Merkle smiling and wearing a suit with a tie

Essential Legacy Planning Documents for a Secure Retirement

Retirement Planner Loren Merkle discusses the critical topic of legacy planning and retirement. Discover the essential documents and strategies that can ensure your legacy is preserved according to your wishes.  – Learn why almost everyone needs a legacy plan, regardless of the size of their assets. – Understand the misconceptions surrounding wills and trusts and…

Read More...

Ready to take your retirement to the next level?

Let's chat! Schedule a RetireReady Call to talk with a retirement planner about your retirement vision.

Ready to take your retirement to the next level?

Let's chat! Schedule a RetireReady Call to talk with a retirement planner about your retirement vision.

Call Now Button