Running and dodging to keep his dad from getting his candy bar, Bart would declare his famous catchphrase: "Nobody better lay a finger on my Butterfinger."
When it comes to your hard-earned retirement savings, you should have that exact same attitude toward the IRS.
In our last post, we talked about the difference between looking in the rearview mirror for tax preparation and looking through the windshield for proactive tax planning. Today, we are digging into Chapter 4 of our book, The Wells of Wealth System, to unpack why proactive tax planning is so critical to protecting your nest egg.
Many retirees have been told not to worry about taxes because they will be lower when they are no longer working. Unfortunately, for many savers, this is a trick. Income taxes can actually be your single largest expense in retirement!
For most families, the majority of their retirement money is sitting in accounts like a 401(k), 403(b), or traditional IRA. All of these accounts have one major thing in common: the taxes have not yet been paid.
Once you reach age 59½, you are allowed to withdraw those funds without penalty, but that is exactly when the taxes finally come due. That is when the IRS steps in, demanding their share of the money you've spent your whole life saving.
To confidently say, "nobody better lay a finger on my 401(k)," you need to diversify your savings based on how the IRS treats them. You can think of these as your three tax buckets:
The Taxable Bucket (Tax Me Now): This includes the money in your checking, savings, and regular brokerage accounts. You already paid taxes on the money when you put it in, but you will owe taxes again on the amount of growth. If the money grows in a regular brokerage account, it qualifies for a capital gains rate.
The Tax-Deferred Bucket (Tax Me Later): This holds the money in your 401(k) or traditional IRA. You put the money in before it was taxed, and it grows without being taxed. However, when you withdraw it, the IRS will have their hand out. They also dictate the rules, like the Required Minimum Distribution (RMD). Once your RMD comes due, for every dollar you fail to withdraw, the IRS will charge a 25% penalty.
While you cannot control tax law or what Congress does, you do have 100 percent control over what you do with your money. You can flip the problem on its head by remembering the TAX acronym:
T - Timing: When you take the income matters. Timing decisions — like which accounts to pull from first or when to start taking Social Security—affect your tax brackets and your Medicare premiums.
A - Allocation: Proper allocation means putting your money into the different tax buckets to reinforce your distribution sequencing.
X - eXit strategy: Planning how your money will transfer to your family is vital. Because of the SECURE Act passed in 2019, non-spousal beneficiaries who inherit an IRA now only have 10 years to pay all the taxes owed on it. A tax-efficient exit strategy minimizes what the IRS gets and maximizes what your heirs receive.
The first step is setting up a 20-minute, no-pressure call with one of our trained and certified Retirement Educators. These are Certified Financial Education Instructors who are trained to answer questions, not certified to sell products, so don’t worry about pressure to sign on that day.
They’ll walk you through the Holistic Planning process, talk through your current financial situation, and, if we seem like a good fit for each other, they’ll pair you with a certified financial planner and fiduciary who will guide you through the rest of the journey toward a comprehensive plan. After the call, we'll create a customized Mini Plan at no cost to you.
This Mini Plan includes 3 essential reports:
Your Social Security Maximization Report,
Your Tax & Portfolio Audit,
And based on those first two reports, your custom, tailored Wealth of Wells Plan.
We used to charge our clients $2,500 for this comprehensive analysis, but we’ve made it free as our way of helping Americans create more predictable retirements.
(And don’t forget to ask your Retirement Educator about your free copy of “The Wells of Wealth System” book! We’ll mail it out within a couple days of your call at no cost to you.)
Even if you’re not quite ready to take that step, we still want you to feel knowledgeable and empowered as you move that direction. Check out the Learning Center on our website for videos and blog posts that will help you understand the different factors at play in a holistic retirement plan and how you can start making small changes today that will have a big impact tomorrow.
Not sure what to ask your Retirement Educator? Here are a few questions that can help you get oriented at the start of your planning journey:
Most people focus on the total balance of their 401(k). As you approach retirement, though, your focus should shift to cash flow. How much of your wealth is liquid and reliable (your future “Liquid” and "Conservative” wells), versus how much is subject to market swings that could disrupt your monthly income?
This is a "stress test" question. Your retirement educator can explain the "Sequence of Returns" risk — the danger of the market dropping right as you start taking withdrawals, leaving you behind for your entire retirement and in danger of outliving your money. They’ll explain the importance of a "buffer" to protect your lifestyle during a downturn.
Tax rates are not static. If the majority of your money is in a traditional 401(k) or IRA, you have a "lien" on your account held by the IRS. Ask the educator how you can balance your "Growth Well" with tax-advantaged accounts (like a Roth) to ensure you aren't losing 25–30% of your future spending power to taxes.
Social Security shouldn't be viewed in a vacuum; you have to look at your retirement holistically. The goal is to find the "sweet spot" where you maximize your lifetime benefits while using your private savings to fill the gaps efficiently. When you file can have other effects on your long-term plan as well, with the formula for survivor and spousal benefits taking the timing into account.
Pro Tip: Whenever you talk to a potential financial planning partner, listen for whether they give you a "one-size-fits-all" answer or if they ask follow-up questions about your specific goals. The best strategy is always the one most tailored to you and your needs, goals and dreams.
• • • • •
Chapter 1: Got Risk? The 3 Biggest Reasons Why People Run Out of Money
Chapter 2: Have It Your Way: 5 Steps to Planning Your Retirement Income
Chapter 3: Time to Make the Dough-nuts: How to Avoid Running Out of Money in Retirement
In the meantime...
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