Retirement Outlook

Don’t Let Taxes Dim Your Retirement

How your clients can plan ahead with a ‘tax bucket list’

by Justin M. Biance

Taxes are on the minds of many this time of year with the filing deadline looming. But too often, people think about taxes only on a one-year-at-a-time basis, forgetting or putting off the need to adjust their strategy for future years – most importantly, their retirement.

As you prepare for your non-working years, it’s critical to consider the burden taxes can pose in retirement. Being proactive and developing a tax-planning strategy is especially important for those who will retire soon. If you have a tax-deferred retirement account (IRA, 401(k), 403(b), SEP, etc.), you unfortunately have an account that has one of the same features as a variable-rate mortgage. At any point, the IRS can change the rate (here, though, it is the tax rate rather than the interest rate).

Some financial experts think that given our growing national debt, tax rates will likely go up at some point in the next few years – increasing from the historically low rates we have now. And remember that when you withdraw money from one of your tax-deferred retirement accounts, you must pay taxes on that money due to the required minimum distribution.

Do you know what your tax rate will be one, five, or 10 years from now? Perhaps you want to withdraw as little as possible and leave it to your children. Do you know what taxes they will have to pay on those funds 10, 20, or 30 years from now? And the future tax burden your spouse could face after your passing is something you must also consider.

The good news is that you can take steps to preserve some of your money in tax-free environments, thereby reducing your debt to the IRS. First, consider the three “tax buckets”:

  • Tax-deferred bucket. These are assets such as IRAs, 401(k)s, and deferred annuities within a qualified retirement plan, etc. These accounts generally grow tax-deferred, which means you only pay taxes when you withdraw the money.
  • Taxable bucket. This is the money you have probably already paid taxes on, and if you invest it, you pay taxes when you realize a return. These are non-IRA assets such as brokerage accounts, savings accounts, or certificates of deposits at your bank.
  • Tax-free bucket. This money grows tax-free, and whether you withdraw your gains or leave it to your beneficiaries after your death, it is tax-free, subject to certain limitations. These assets include Roth IRAs and life insurance.

It’s more common to have most of your money in the tax-deferred and taxable buckets. If you are interested in being proactive for the long term, here are two strategies worth considering to put more in your tax-free bucket:

Roth Conversions

Some conditions must be met to contribute to a Roth IRA, such as earned income, income level, and amount of contribution, so not everyone can contribute to a Roth. However, converting your tax-deferred money to a Roth IRA is possible for everyone. A Roth conversion must keep the big picture in mind, but if we look at the long-term savings of a Roth conversion, it can be significant.

Here’s an example of a married couple, Greg and Tina, both aged 65 with an annual income of $75,000, whose goal is to convert $200,000 of an IRA (tax-deferred) to a Roth IRA (tax-free). The tax impact on them from a traditional IRA vs. a Roth IRA is based on these assumptions: living through age 90, a 25% effective tax rate (combined federal and state) on RMDs and taxes paid on death, a 15% capital gains tax on reinvested RMDs, and a 5% average rate of return over the period. In a $200,000 conversion to a Roth IRA, they would pay $46,000 in taxes – in the year of their conversion – under the current tax code. Converting $200,000 to a traditional IRA, by contrast, would result in $62,692 in taxes on RMDs at age 72.

Some financial experts think that given our growing national debt, tax rates will likely go up at some point in the next few years – increasing from the historically low rates we have now...

The bigger tax savings are down the road. For a Roth IRA, their taxes on reinvested funds are $0, and the taxes on value at death are $0. Total taxes paid for the Roth IRA: the $46,000 paid for the one-year conversion.

By contrast, capital gains taxes on reinvested RMDs for the traditional IRA are $26,796. Taxes on value at death for the traditional IRA: $41,665. Total taxes paid if they had stuck with the traditional IRA: $131,153.

A Roth Conversion is a taxable event and may have several tax-related consequences. Be sure to consult with aqualified tax advisor before making any decisions regarding your IRA. This is a hypothetical example provided for illustrative purposes only; it does not represent a real life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation.

Life Insurance

High-income earners are not the only group of investors who turn to life insurance. Pre-retirees and retirees are interested in this option because, in addition to the death benefit and potential for tax-free income, if the contract includes the additional benefits of long-term care, they can kill two birds with one stone.

The death benefit is also tax-free. If you are looking for the following features, a permanent life insurance policy might be a consideration for you:

  • Tax-free death benefit for heirs
  • No income limitation on contributions
  • Tax-free growth
  • Tax-free withdrawals
  • Tax-free long-term care benefits (with the purchase of an added LTC rider)

Keep in mind, however, that because this is life insurance, there are fees and charges, including surrender penalties for early withdrawals. You will need to qualify for the policy medically and perhaps financially, and fund it appropriately for it to remain in force.

If you want the IRS to take the smallest bite possible out of your money, consider these strategies that allow you to convert your tax-deferred money into tax-free money. Being proactive is the key to enjoying your retirement more on your terms.




About Justin M. Biance, CEP®
Justin M. Biance ( is the author of Designed to Last: Renovate Your Financial House And Retire With Confidence. A financial advisor and insurance professional who holds the Certified Estate Planner™ designation, Biance specializes in multi-generational legacy planning and creating tax-efficient strategies for business owners. He is co-founder of J. Biance Financial and the Retirement Design System®, which helps pre-retirees and retirees create confidence in every area of retirement. Biance holds a Master of Science in entrepreneurship from the University of Florida and a Master of Arts in theology from Holy Apostles College and Seminary. He hosts a radio show, Retirement Design with the Biance Brothers, which airs in Florida and North Carolina.
Neither J. Biance Financial nor its agents or representatives may give tax or legal advice. The appearances in this media outlet were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission. Insurance offered through J. Biance Financial, 545 S. Pine Street Sebring, FL 33870 863-304-8959. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and J. Biance Wealth Management are not affiliated companies. 1187409 – 1/22.