Throughout your working years, you likely enjoyed a range of tax advantages, from deductions on your mortgage to tax credits for your children, tax-advantaged contributions to educational and/or retirement accounts.
 
Unfortunately, when you transition from working to retirement - what was once a favorable breeze may feel more like a challenging headwind.
 
For instance, during retirement, the government will compel you to withdraw funds from your qualified retirement plans (QRPs), such as a 401(k) or 403(b), as well as traditional individual retirement accounts (IRAs) - whether you need the money or not and subject those withdrawals to ordinary income tax rates. This is known as a Required Minimum Distributions.
 
You've paid into the Social Security program throughout your working years. Now, the amounts you receive back may be taxed at either 50% or 85%, depending on your taxable income.
 
The weight of our substantial national debt has prompted Congress to seek additional revenue sources, including adding in additional tax surcharges. The Net Investment Income Tax (NIIT), the Medicare Part B and D premium surcharges (IRMMA), and the Social Security tax torpedo are three examples that now impact retirees.
 
The tax reform that was introduced by the Tax Cuts and Jobs Act in 2017 is scheduled to sunset in 2026. This could potentially result in tightened tax brackets, the reintroduction of additional tax brackets, a reduction in the standard deduction, and a lower estate exemption that may now tax a broader number of retirees.
 
Many retirees may grapple with the 'widow's penalty'. Following the passing of one spouse, the surviving partner may lose one of the Social Security benefits, be forced to file in the single tax bracket, and with the forced income from the ever-increasing Required Minimum Distributions (RMDs) - be forced into a higher tax bracket, and on top of that, now possibly having to pay a Medicare surtax.
 
The Secure Act legislation passed in late 2019 could also impact your children. Upon inheriting an IRA, this legislation may necessitate that the beneficiary fully distribute these tax-deferred funds by the end of the 10th year following the original account owner’s death, potentially pushing them into a higher income tax bracket while in their peak working years.
 
Given these complex financial challenges, it becomes clear that important retirement decisions cannot be made in isolation. You can craft a fantastic investment plan - and get crushed with the tax bill. A partial Roth conversion today might inadvertently trigger a higher Medicare Part B and Part D surcharge due to the increase in recognized income. An integrated approach to retirement planning is indispensable, encompassing
investments, taxes, asset safeguarding, liability management, and strategies for wealth transfer.
 
My goal is to assist you in formulating a retirement income strategy that ensures we create income done in a multi-year, tax-efficient manner. Among the potential strategies are partial Roth conversions, tax bracket smoothing, establishing a donor-advised fund and/or using Qualified Charitable Distributions (QCD) for gifting, effective capital loss and capital gains harvesting, thoughtful asset location, and collaborating to create an estate plan that optimally aligns with the needs of all individuals in your life with tax efficient estate planning.
 
Wells Fargo Advisors is not a legal or tax advisor.