Does retirement seem like a distant, imaginary country to you? Maybe a goal that seems far unattainable? Be careful – one day, out of nowhere, you will reach the “Promised Land” pension. For some it is planned, for some it is forced, and for some it is a decision to retire at once. For those who are planning to retire, we hope that this new phase of life contains a limited amount of unknown and unwanted surprises. But for those who are more surprised – what now?
First, if you don’t currently have any, find a CFP and CPA expert who will make you feel comfortable helping you navigate or plan this new territory. Both trusted experts adhere to the highest ethical and professional standards of their committees. The CFP specialist has completed the required courses, met the experience requirements, and maintains appropriate educational requirements to help people financially plan all stages of life. The CPA can help unwind all the intertwined tax laws and regulations that can burden someone in retirement.
Next, along with your CFP professional and CPA, review all the retirement vehicles you have built in your lifetime. This will include things like 401 (k) accounts, IRAs, pension plans, annuity investment accounts, investment real estate, social security benefits, savings, etc. Each of the aforementioned vehicles has its own tax conditions. Withdrawing the necessary amount of money to live from one vehicle to another could adversely affect the longevity of your pension funds. Some vehicles are taxed at normal income rates (currently as high as 37%), others could be taxed at long-term capital gains rates (currently as high as 20%), and some may be completely non-taxable.
Vehicles that are taxed at regular income rates include traditional 401 (k) accounts, traditional IRA accounts, and most retirement plans. Roth 401 (k) accounts and Roth IRA accounts contributed by dollars after tax could have grown tax-free and could be tax-free (as long as all requirements are properly met). Investment accounts provide a hybrid of tax rates. Interest, non-qualifying dividends and short-term gains will be taxed at a higher rate of regular income, while qualifying dividends and long-term gains will be taxed at a lower rate of capital gains. Social security benefits can be completely non-taxable if your taxable income is below a certain limit or even 85% of your social benefit can be taxed at normal income rates. Investment property, including rental homes, holiday homes, commercial real estate, etc., is treated as passive income (for the most part) and profits will be taxed at normal income rates. Sales of investment property held for more than one year will be treated as capital income and taxed at lower capital gains rates. Return on capital or the basis of investment property will not be taxed.
As you can see, there are different ways you can fund your retirement needs. The key is to build your team of financial professionals to help you build your retirement portfolio now, not later. It is just as important to fund a proper retirement vehicle while you work as it is to withdraw funds from a real retiree.
Adam H. Baucom CPA / CFP is Senior Tax Manager for Keller & Associates CPA, PLLC. He has over 10 years of experience in tax planning, tax return preparation and accounting.