March 2017: Tax Strategies & Retirement Income

Tax Strategies for Retirement Portfolios 

Tax-deferred financial vehicles are an effective way to accumulate assets while you’re working. However, once retired, individuals should carefully consider how (and when) to position assets to help optimize growth and income while reducing their tax liability. The following are some points to remember about distributions.

Taxable Investment Portfolio

  • Short-term capital gains are taxed at ordinary income rates
  • Long-term capital gains (investments held one year or longer) are subject to capital gains tax of up to 20%, depending on your tax bracket

Traditional IRA

  • Tax-deductible contributions grow tax-deferred until withdrawn
  • Required minimum distributions begin at age 70 ½
  • All distributions are taxed at ordinary income rates

Roth IRA

  • Post-tax contributions are not subject to income tax
  • Earnings are generally tax-free after age 59 ½

Non-qualified Annuity

  • Post-tax contributions are not subject to income tax
  • Earnings are taxed as ordinary income

Qualified Annuity

  • Tax-deductible contributions grow tax-deferred until withdrawn
  • Required minimum distributions begin at age 70 ½
  • Distributions are taxed at ordinary income rates

Life Insurance Contract Cash Value

  • Generally, distributions in the form of policy loans are tax free
  • Interest earnings that are credited to your policy are generally tax free when paid in the form of a death benefit, but are taxed as ordinary income if the policy owner surrenders the policy.

Most retirees are in a lower tax bracket once they stop working. If a retiree is in the 15 percent tax bracket, earnings from a taxable investment portfolio will no longer be subject to a capital gains tax. Every individual’s situation varies, so it’s important to consult with a tax advisor and a financial advisor about the most tax-efficient ways to withdraw or reposition assets during retirement.1

Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force.
The content provided in this newsletter is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. 
Although there is no up-front tax deduction for Roth IRA contributions, qualified distributions are income tax free. If properly structured, proceeds from life insurance are also generally income tax free. 
1 Danielle Andrus. Think Advisor. Aug. 25, 2016. “How to Build Tax-Efficient Withdrawal Strategies for Retirement.” Accessed Jan. 31, 2017.


Retirement: Spending vs. Income Planning

One common rule of thumb for retirement savings is to replace 80 percent of your pre-retirement income — or an even higher percentage.1 But what if you currently spend more than you earn? Or what if you spend much less than you earn? Perhaps a better measure would be to base your retirement income on your current spending habits. After all, income isn’t always a measure of a person’s lifestyle; spending habits often provide more clarity on the lifestyle we live.

In retirement, you will likely spend less money on things like housing, clothes, commuting and children. On the other hand, you may spend more money on health care and household assistance. Therefore, it may make sense to plan on having enough income to cover the same level of spending as your pre-retirement years.

According to a survey by the Employee Benefit Research Institute, about 38 percent of retirees report they actually spend more in retirement than they did while they were working. Twenty-one percent say they spend less, while 38 percent say they spend the same amount.2

If you go by the results of this survey, more than half of pre-retirees need to plan for at least as much income as they spend now — which may be a challenge for those who already spend more than they earn. Regardless of how much you earn now, you may want to consider basing your retirement income plan on how much you currently spend, rather than how much you currently earn.

1 Michael Finke. Think Advisor. Aug. 3, 2015. “How Much Income Do Retirees Really Need?” Accessed Jan. 30, 2017.
2 Employee Benefit Research Institute. March 2016. “The 2016 Retirement Confidence Survey: Worker Confidence Stable, Retiree Confidence Continues to Increase.” Accessed Jan. 9, 2016.

Leave a Comment