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When Retirement Planning and Tax Planning Come Together

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When Retirement Planning and Tax Planning Come Together: Sequencing Retirement Income in a Tax-Efficient Way – Including a Critical Look at Annuities 

Amended 10/17/2023

When we’re planning for retirement, one of the important things is tax planning and creating a strategy for how we’re going to draw on different sources of income. Decisions made at the intersection of tax planning and retirement planning can have a huge impact. The Secure Acts (2019 and 2022) changes to retirement planning are also shifting tax planning and retirement planning strategies.

Many people will need to decide when to start taking Social Security. This is especially true for high-net-worth financial planning where other sources of income are significant.

People also may have pensions – meaning defined benefit plans – where the amount of the benefit is like the Social Security benefit: it varies with how early or late it’s begun. And many people have IRAs or 401K accounts or both, from which required distributions will need to begin at a particular age. And some people may also have additional assets from which income theoretically could be drawn, such as Roth IRAs or annuities or cash value inside a life insurance policy.

With the passage of the Secure Acts of 2019 and 2022 and their changes for both distributions and non-spousal beneficiaries, it’s important for people to carefully review and potentially make changes in how and when various retirement income assets should be turned on and off.


There are several issues worth considering:

Increased life expectancy: it can be a mistake to move asset allocations too early from equities and long-term capital appreciation strategies to fixed-income holdings, which produce lower returns.

Appreciation in tax-deferred accounts, like an IRA or 401K: with the passage of the Secure Acts, required minimum distributions from an IRA don’t need to start until age 72 or 73, but accumulations in those accounts may face higher withdrawal requirements, which can force people into higher tax brackets during retirement.

Social Security deferral: every year between full retirement age and age 70 that someone defers taking Social Security means an enhancement in the monthly benefit. So balancing how long to defer Social Security against other sources of assets can be important.

Cash value and tax-free withdrawals from life insurance: sometimes, tax-free withdrawals can be a powerful way of managing when to draw on all these other types of assets. Adjusting retirement planning during a bear market, for example, may be a situation where cash value allows you to defer selling stocks that have declined.

The costs and benefits of a reverse mortgage: closing costs to initiate one are high, and they’re not right for everyone. But they do have advantages as well. In some years, modest use of a reverse mortgage line of credit may allow someone to better use their tax brackets and enable better use of withdrawals and capital gains from other sources. Again, if the stock market has had a rough year or two, the reverse mortgage can defer the need to tap into investments, allowing them time to recover. More proactively, having the reverse mortgage in place also allows asset allocation to be nudged marginally toward a higher allocation in higher-return asset classes.

Roth IRA conversions: these can enable paying taxes now on some IRA money so that you can convert the IRA into a Roth IRA, which will allow you to receive withdrawals at least five years in the future completely tax-free. Roth IRAs also are a lot more attractive to non-spousal beneficiaries.

Annuities: an annuity for retirement planning can provide the security of fixed income. But it also can come with high costs and agent commissions and therefore be expensive relative to the amount of this income. Besides, annuities come with certain risks that are often under-appreciated. Let’s take a closer look.

The Annuity in Retirement Planning: More Detailed Issues

Annuities are insurance products and can be of the following types: fixed-income, variable, and indexed; deferred or immediate.

A fixed-income annuity generates a stable monthly payment – often attractive, especially to older people. An important issue, however, is that low-interest rates pose a real risk to the viability of fixed-income annuities. Low-interest rates can make it challenging for the insurance companies that market annuities to find enough highly rated fixed-income securities that can still generate adequate income for the annuity buyer.

By contrast, for variable annuities, the premiums paid are invested in the stock and bond markets, which offer the potential for more growth. But these markets also pose a huge risk in that you can’t control the portfolio. Thus, growth is not guaranteed, and losses could affect the principal amount.

An indexed annuity, which is tied to a particular index like the S&P 500, may be a better bet for retirement planning and income. The annuity pays interest based on the index’s performance – higher when the index does well – and guarantees a small interest rate as a floor in tougher years. While these are advantages, you usually have to wait many years before the annuity is turned on. During that period, there can be a lot of lost opportunities for the money parked in the annuity.

An annuity might work for someone who lacks the emotional discipline for investing in the face of market volatility.  But keep in mind that the purchaser of an annuity is buying certainty at a very high cost given the charges and the expenses.

While annuities present particular pitfalls, there are more detailed issues to consider for all types of potential retirement income sources. Good retirement planning and tax planning for when to draw on which assets for income means carefully assessing all the sources you have available. Wise choices stretch the value of your assets while minimizing the taxes you pay.

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