Planning for Taxes: How Harmon Street uses Financial Planning to Reduce your Tax Burden over your Lifetime

By Dan Sherman, EA CFP

If you are a client of Harmon Street Advisors, we review your financial plan at every meeting.  While the most important part of a financial plan is savings and returns, a portion of this financial plan is dedicated to taxes.  Through financial instruments like Roth accounts, Municipal bonds, and tax-efficient long-term capital gains, we may reduce the overall tax bill and allow our clients and their heirs to keep more money.  Using our extensive retirement planning software, this long-term strategy thinking is much easier to visualize.

When you retire, taxes matter a lot.  Initially, your health needs might be lower, and hopefully, the mortgage is paid off.  So, it can be time to consider a Roth conversion.  This helps reduce your taxes and required minimum distributions (RMDs) over the life of the plan.  It also means your heirs won’t have to pay taxes at their tax rate at inheritance.

Early retirement almost always triggers high health premiums, costing as much as $20,000 annually until Medicare kicks in. Those costs, however, may be tax deductible.  You may be able to deduct those premiums and costs, plus traditional long-term care insurance premiums.  You may have a lower tax rate when adding to property taxes and mortgage interest deductions, ideal for Roth conversion.

You may also have kids that require support while you are in retirement.  College, in particular, can cost as much as $80,000-$100,000 a year for private schools, especially if your kids are young and outside California’s lower-cost state schools.  Trying to pay for college out of your IRA could potentially trigger the Alternative Minimum Tax, or “AMT”.

Creating a non-qualified account (regular trading account) and investing in tax-efficient investments like municipal bonds may help reduce any AMT tax by reducing your modified adjusted gross income.  The alternative is to fund a 529 college savings account, but if your kid doesn’t attend school or doesn’t need as much as anticipated, it could lead to additional taxes and penalties.

Other considerations when it comes to retirement distribution are the cost of IRMAA, net investment income tax, and social security inclusion ratios.  If your modified adjusted gross income exceeds a certain threshold, you will be subject to increased Medicare costs through Income-related monthly adjusted amount, also known as IRMAA.  Using a Roth IRA reduces your modified adjusted gross income because it’s not considered income when distributed.

If you use equity (stocks) in a non-qualified account that you’ve held for a long time and have large capital gains, you can be hit with an additional 3.8% Net Investment Income Tax if your income is more than $200,000-250,000, depending on your filing status .  This can occur either when paying for college or long-term care.

Last, if you have limited income, taking too large of a distribution from a retirement account may increase taxes on Social Security.  The Social Security inclusion ratio determines how much your Social Security will be taxed.  Taking out extra for a car or to pay off a debt may increase your ratio from 15-50% to a maximum of 85%.  Planning for goals and taking out a little extra each year can maintain that lower ratio and save a few hundred or more in taxes.

There is a lot to consider when planning your retirement, and the tax consequences of a poor decision may not be felt for years or decades later.  By using financial planning, your financial advisor can help you navigate these tricky tax code rules.  Using a Certified Financial Planner (CFP®)  provides a professional trained to consider all these challenges.

Of course, the financial planners at Harmon Street Advisors are all CFP® certified and happy to help you with your retirement planning.  Please get in touch with us if you have further questions.