How Tax Planning Changes Through 4 Stages of Retirement

Every year, more clients are shocked by how much they have to pay in taxes. Whether it’s their IRA, 401(k), or another tax plan, they seem less prepared every year, and that’s understandable.

Everyone knows the tax code is a convoluted mess, but few realize just how many hidden penalties lurk in the paperwork and how easy it is to have the system misunderstand you.

It’s key to start thinking about retirement early and to lay your plans carefully through four stages. Here’s how tax planning changes through four stages of retirement, and how to avoid surprises.


The Stages

In Stage One or pre-retirement, you want to gear up your savings in preparation for getting off the work train. 

This is when you’re approaching the top level in your field. You’re making more money, and so can afford to park more away.

Stage Two, early retirement, is what we call the “go-go” years.

This is when you’re between 60-70, have reached the peak of your career, and are making the most you’re going to make. Think of it as the top of the retirement rollercoaster.

Stage Three, middle retirement, is when the rollercoaster goes into its downslope.

You’re in your 70s now and are ready to enjoy your golden years and what you’ve saved.

Stage Four, late retirement, is the no-go stage.

This is what you’ve been preparing for the most. You’re over 80 years old and need to make money on the money you’ve saved so you can enjoy the rest of your life in peace.


Retirement Surprises

People forget to account for inflation when planning for their retirement, especially earlier on. They think of their future costs in current dollars, not realizing how everything’s cost will grow with inflation.

Many also discount how long they’ll live. While a great outcome in isolation, it’s not so great if you don’t have the money you need to continue enjoying life.

The final two are expenses and healthcare. Many future retirees don’t consider how much it will cost them to keep living their current lifestyle given what they’ll need to pay for healthcare.


Avoid the Surprises

Know what your after-tax retirement savings picture looks like before retiring. So many people look at their 401(k) or IRA, see $500,000, and think that’s what they have. It’s not. Uncle Sam will wet his beak, and you want to be prepared for it when he does.

If you’re already retired, you’ll want to start evaluating next year’s potential tax bill before you start tapping assets in the new year. Remember that Social Security and Medicare have “tax traps” and you need to plan for them.

For example, if you withdraw money from your IRA, it can push you into a higher tax bracket and the IRA might tax your Social Security benefits. That higher income (i.e. withdrawing assets) can also cause potentially hundreds of dollars a month in extra payments on your Medicare premiums.

So make sure to plan how and when you want to use taxable, tax-deferred, and tax-free assets when looking at your retirement goals.


Manage your income and tax brackets.

Some actions to take are:

  • Drawing down your IRA now, so that your required minimum distributions (RMDs) won’t have as large an effect on Social Security taxation and Medicare premiums.
  • “Filling your tax bracket” in lower-income years through Roth conversions or selling appreciated stock to take advantage of a lower tax rate.
  • Donating your RMDs directly to charity to avoid paying income tax on the distributions, through what is known as a qualified charitable distribution (QCD).


Think about step-up basis strategies for your heirs

There are multiple ways to leave IRAs as an inheritance. Make sure your heirs get the best and easiest transfer possible.

Long-term care is a major concern for many people. You need to plan how you will fund this likely expense, and still leave an inheritance for your heirs.


The Solution

We understand if this seems overwhelming. The IRS designed it to be. If you think you can’t navigate this, feel free to reach out to us for help.

We can anticipate how and when you tap assets to cover your expenses, guide you through the range of taxes you will face at various stages, and manage your actions so you pay as low a tax rate as possible.

Confidence Wealth Management team





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Confidence Wealth Management LLC (CWM) is an SEC registered investment adviser. Confidence Wealth & Insurance Solutions LLC (CWIS) is licensed under the NV Department of Insurance, license no. 3647322. CWM and CWIS are two separate affiliated companies. All investment advisory services are provided by CWM and all insurance products and services are provided by CWIS. CWIS does not provide any investment advisory services and CWM does not provide insurance services. CWM and CWIS have no affiliation with government, state, or local agencies. Consult with an attorney or CPA for usage of tax or legal concepts. This material may contain information that are close approximation to the totality of information available to us and not necessarily specific within regards to one situation or another. Some opinions and statements are informational. They are not investment advice as they may not be complete in terms of all details needed to affect an action you wish to undertake, investment strategy or plan. Pursuant to IRS Circular 230, the material is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. No estimates used are a promise of return. Also, many opinions are summaries and may not reflect all pertinent facts relevant to you. Any information given is to be considered general, and nothing said herein should be used as a basis for investment decision unless you consult with your Confidence Wealth advisor that can understand your unique situation and give you a customized solution with a complete disclosure. Past performance does not indicate future results. As you know, no one can predict the future. Thus, any forecast in this material is intended strictly as a possible future outlook and not a statement of fact as there could be any scenarios that are not in your favor when making a decision. You must examine all adverse and negative implications on any forecast when made. All information is based on the date of the material and may not be valid, may change, and/or may not be true any longer as time passes. Also, the Form ADV Part 2A for CWM contains detailed disclosures regarding our services and fees, along with applicable conflicts and how we address such conflicts. A copy of our Form ADV can be obtained by calling (310) 824-1000.

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