Income planning

Once you are no longer working, you need to determine not only how much income you can afford to spend each year, but also from which accounts you should be withdrawing. Most people have some money in both non-qualified accounts, which may produce taxable income on a yearly basis, and some money in tax-deferred accounts, such as IRAs and deferred annuities.

If you take income from the wrong places, it could push you into a higher tax bracket and reduce what you have to spend after taxes. Conversely, if you only take income from non-taxable accounts you could wind up costing yourself and your heirs more taxes over the long run, especially if tax rates increase. Therefore, it’s advisable to consult with a financial professional well versed in income taxation planning prior to establishing an income strategy.

With a lower tax rate, it may make sense to increase withdrawals from tax-deferred accounts such as IRAs and deferred annuities in the current tax year. Under the new tax laws, married couples get a $24,000 exemption. The next $77,400 of income is only taxed at 12 percent. (For higher income couples, the marginal tax rate is still only 24 percent up to $315,000 of joint income.)

For example, if your social security is $24,000 and your required minimum distribution from your IRA is $34,000, that may be enough income for you to maintain your lifestyle, but you could still pull out another $40,000 from your IRA or deferred annuity and pay only 12 percent taxes on that additional income, which is a pretty low rate historically.

If a new Congress increases tax rates or your children are in a high tax bracket when they inherit your accounts, you or they could wind up paying much more than 12 percent (possibly even more than 40 percent) when the money is withdrawn at a future date.


Keith Singer

Keith Singer, a well-known financial advisor in Florida, is both a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a licensed Florida attorney.

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