Retirement Download
Strategies for a successful retirement
Strategies to Minimize Tax Burdens in Retirement, According to UBS
Planning for retirement goes beyond saving—it’s about smart strategies to minimize taxes and maximize your wealth.
Let’s dive into UBS’s expert insights on minimizing tax in retirement:
Understanding Tax Diversification
To reduce the tax impact during retirement, UBS emphasizes the importance of tax diversification. This involves saving in accounts with different tax treatments—taxable, tax-deferred (e.g., 401(k) or traditional IRA), and tax-free (e.g., Roth IRA, Roth 401(k), or health savings account). By strategically allocating funds across these account types, retirees can manage their tax liabilities more effectively when withdrawing assets.
The Risks of Tax-Deferred Accounts
While tax deferral is beneficial during working years, it can create challenges in retirement.
Withdrawals from tax-deferred accounts are taxed as ordinary income, potentially at rates as high as 37%.
These withdrawals can push retirees into higher tax brackets, increasing their tax burden. Additionally, a modified adjusted gross income (MAGI) exceeding $106,000 for individuals or $212,000 for joint filers can lead to higher Medicare Part B and prescription drug premiums, with costs rising significantly for higher income brackets.
The Spending Waterfall Framework
UBS proposes a “spending waterfall” framework to help retirees manage withdrawals and minimize taxes. This includes three buckets:
Liquidity Strategy: Covers three to five years of expenses with accessible cash flow.
Longevity Bucket: Addresses needs beyond five years.
Legacy Bucket: Supports goals extending past the retiree’s lifetime.
Retirees should calculate their spending needs, subtract expected income, and determine how much to withdraw from taxable or tax-deferred accounts. Coordinating with financial and tax advisors to set a target marginal tax rate helps avoid higher tax brackets.
Sponsor: If you have $100k to $3M+ of investable assets, you could benefit from hiring a financial advisor.
Our partner, Money Pickle, makes it easy to match and meet a vetted advisor based on your goals. Financial advisors can help with: Tax strategies, optimizing investments, planning ahead for retirement, college planning for children, and more.
Strategic Withdrawal Planning
Retirees should work with advisors to decide which accounts to tap based on their spending needs. For example:
If spending is below the target tax bracket, withdrawing from tax-deferred accounts may be suitable to utilize lower tax rates.
If spending exceeds the target bracket, withdrawing from tax-free Roth accounts can help avoid higher taxes.
Regularly revisiting and adjusting the plan ensures income and tax rates are smoothed over time, optimizing after-tax wealth.
Ongoing Adjustments and Professional Guidance
Retirement plans are dynamic, requiring annual reviews with financial and tax professionals to adapt to changing needs and tax laws. The goal is not to optimize every dollar but to maintain consistent income and tax efficiency throughout retirement.
Resources
How was today's newsletter?
👩🏽⚖️ Legal Stuff
Nothing in this newsletter is financial advice. Always do your own research and think for yourself.