By Jeremy A. Wechsler, Esq.
Investment Advisor Representative
[email protected]
Hope you are having a good first week of summer! The stock market continues to give us plenty to watch—between inflation, interest rates, geopolitics, corporate earnings, and the ongoing debate over an AI bubble. As always, we’re keeping a close eye on it for our clients. But this week’s article isn’t about the stock market.
When people think about retirement planning, they naturally think about investments. Is the market too high? Should I own more stocks? Am I taking too much risk?
Think about it this way. Many people stress about earning an extra 1% on their investments. Yet, making one poorly timed financial or tax decision can cost far more than a year’s worth of investment performance.
For example, many retirees automatically wait until they’re required to take Required Minimum Distributions (RMDs). On the surface, that seems logical—why pay taxes any sooner than necessary?
The problem is that by waiting, your retirement accounts may continue growing for years, eventually producing larger RMDs. Those larger distributions have major consequences:
- First, you could be pushed into a higher tax bracket
- More of your Social Security benefits become taxable
- Higher charges coming out of your Social Security check through what’s known as IRMAA
One strategy that can make sense for some retirees is gradually converting portions of a Traditional IRA into a Roth IRA during the years between retirement and the start of RMDs. Done thoughtfully, those conversions may allow you to pay taxes at lower rates today in exchange for reducing future RMDs and creating a source of tax-free income later in retirement.
The goal isn’t simply to build the biggest nest egg. It’s to keep as much of it as possible.
Every situation is different, and Roth conversions do not work for every client. But they illustrate an important point: Retirement planning isn’t just about growing your money. One of the most important retirement planning decisions is determining when and how to recognize taxable income. You should also give serious consideration to acquiring life insurance that passes onto heirs tax-free, which in certain cases may be a better alternative for you verses Roth conversions. A number of our clients do both.
That’s why retirement planning is so much more than investment management. Tax planning, Social Security, Medicare, income planning and investment planning are often interconnected, and giving all of them the thought they deserve can yield better financial outcomes in retirement.
Investment performance will always matter. But for many retirees, thoughtful tax planning, income planning, Social Security decisions, and Medicare planning ultimately have a greater impact on how much of their hard-earned money they actually keep.
Retirement planning isn’t a one-time event. Tax laws change. Markets change. Your life changes. Your retirement plan should evolve along with them. If you’d like to discuss how these issues apply to your own retirement, don’t hesitate to reach out.