The Cash Flow Clock: For Retirees - Book - Page 40
The Cash Flow Clock
Tax Planning Strategies
Tools are neither good nor bad. They all have features and limitations, pros
and cons, benefits and drawbacks. The key is to find which tools make
sense for us and then figure out how to utilize them efficiently.
Using QCDs is a great tax planning tool and perhaps the easiest and best
decision we can make if we are old enough. But only if we are going to
donate to charity anyway. There is no reason to include QCDs in our
financial plan if we are trying to hang on to as many of our assets as
possible.
Roth conversions can be very powerful tools. But not everyone should do
them. A tax forecast can help us determine the best way to utilize
conversions.
When we pay taxes determines how much tax we pay. Most taxpayers end
up with most of their portfolio in tax deferred accounts because they
believed that their income would be less in retirement. That could be true.
But the whole point of saving for retirement is to have assets to spend in
retirement, when we have the time and freedom to do the things we have
always dreamed of doing. If we are pulling from tax deferred assets to fund
our retirement, our taxable income may actually be higher once we stop
working.
Even if our income is lower in retirement, our taxable income could be
higher. If our house is paid off, property taxes are low, dependents are out of
the house, etc., then the tax deductions and credits we enjoyed early in our
career will no longer be there when we retire. Tax rates are going up starting
in 2026 (based on current law) and are likely to increase beyond that unless
the government figures out a different way to resolve the issues surrounding
Social Security, Medicare, the national debt, etc.
Perhaps the biggest factor in determining our taxes in retirement is the death
of a spouse. While that can occur at any time, it is certainly more likely the
older we get. Surviving spouses almost always have less income (because at
least some Social Security income will go away, not to mention pensions or
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