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Tax Planning for Retirement

By: Chuck Strauss

March 22, 2013

Retirement planning is a complex process with a number of critical steps.  Without careful advance planning, important elements can fall through the cracks and cause significant financial loss.

While many consumers have been told to continue to defer their retirement as long as possible, doing so can create a tax planning “time bomb” once required minimum distributions (RMD)* are triggered or passed on to beneficiaries. Advanced analysis of a tax-efficient sequence of withdrawals can protect your beneficiaries from rising tax rates in the future. You may want to consider an approach which may include paying more tax today at lower tax rates to avoid the erosion effects of rising tax rates in the future.

* An RMD is the amount that Traditional IRA owners and qualified plan participants must begin taking from their retirement accounts by April 1 following the year they reach age 70-1/2, and each subsequent year after that. 

You may need to learn how, for example, Social Security payments are taxed and how to avoid unnecessary taxes, where additional income is taxed at higher rates than an individual’s usual tax bracket. (Here is a LINK to an article on the subject of taxation of Social Security payments.)

Tax-efficient investing and withdrawal procedures can enable one to withdraw fewer assets and achieve a good net income result, allowing unused assets to accumulate longer untouched.

Some examples:

Health Savings Accounts (HSAs) Millions of Americans now set aside pre-tax dollars for their medical expenses using HSA plans. However, you do not have to use the money in an HSA by any particular deadline; it can serve as a powerful “savings” tool to supplement retirement accounts. Under the law, if HSA funds are withdrawn before age 65 and used for other than qualified medical expenses, the amount withdrawn is subject to a 20% penalty. However, if you lose your job, you will keep your HSA and have access to the money you have accumulated.  Another important feature is that if you do quit your job or get laid off or fired, the money in your HSA account can be used to pay the premiums for temporary COBRA insurance. Similarly, if you receive federal or state unemployment benefits, HSA funds can be used to pay premiums for any health insurance.

An additional feature of HSAs is that you can use the funds to cover your premiums for Medicare and Long Term Care insurance.

Tax-deferred. Remember also that the funds placed into the HSA account can grow tax-deferred just like an IRA, and can be invested in any investment vehicle available to your HSA. Additionally, HSA accumulated funds are NOT subject to RMD  requirements.

Don't forget about Medicare. Medicare Part A is automatic. Retirees can sign up for Medicare Part B beginning three months before the month they turn 65. (See the PRO-TAX Article on the Medicare Alphabet) But if taxpayers do not sign up during the eligibility period, Part B premiums can increase by 10 percent for each 12-month period that enrollment is delayed. People who are still working and are covered by a group health insurance plan through their job must sign up within eight months of leaving the job to avoid the penalty. If you elect to receive prescription drug coverage under Medicare Part D, it's important to shop around for a new policy annually during the open enrollment period because covered medications and cost-sharing requirements often change each year.

Tax Planning  Remember that premiums paid for Medicare Part B-- the medical insurance portion; Part D – the prescription medication portion; plus a Medicare Supplement policy OR a Medicare Advantage policy are eligible for deduction on Schedule A among other health costs – above a certain minimum.

Taxes saved today or in the future are additional money earned.

You will want to keep tax planning as an important part of your overall financial planning. Taxes can be technical and tricky. If something is persistently confusing, talk to an experienced tax preparer.