You spent your whole life planning for retirement by saving. Now, there is a different type of planning - How to use your assets in the most tax-efficient way to avoid taxes in retirement that would otherwise be unnecessary to pay.

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In this webinar that we did for clients in 2020, we look at the benefits of tax planning strategies around large purchases such as cars or retirement homes. There can be significant tax benefits for coming up with an optimal retirement income strategy and withdrawal plan for selling assets in qualified retirement accounts.


We cover many examples to help show you the impact that these large expenses can have on your retirement plan, and also how to manage withdrawals strategies from IRAs, 401(k)s, Roth IRAs, and taxable brokerage accounts to reduce retirement taxes as much as possible.

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Tax Efficient Retirement Account Withdrawals

As an example of the benefits of simple a tax efficient withdrawal strategy, I thought maybe the best place to start would be a relatively simple example. For our example, we are looking at a recently retired married couple in Iowa, with a decent Social Security income, and living expenses of $80,000.

On top of those normal living expenses, they want to purchase a new car, which will be an increase of $35,000 in expenses for the year.

And this couple’s largest form of savings is in their IRA. And because it is this couple’s largest retirement account, they use the IRA to fund all of their spending needs that are in excess of their Social Security received.

So, what happens to this couple? Well, they withdrawal an extra $35,000 out of their IRA. This creates more taxable income for them. That income bumps them up into a higher tax bracket for the year.

In total, because these IRA withdrawals are taxed like normal income, they would pay just over $15,000 in total taxes

Then, the following year, they would pay much less in taxes because they have less in withdrawals without the car purchase.

And in total over these 2 years, they are paying about $18,712 in taxes.

Now we will get into a little bit more of the details in how these numbers are calculated later, and why just a $35,000 purchase can have such a large increase in total tax bill. But for now, just remember this $18,700 number

Here’s a Tax Efficient Withdrawal Strategy:
Now, let’s look at if this same couple did things just a little differently.

Instead of pulling all $35,000 out in one year, this couple pulls half of that $35,000 out in 2020 and the remaining half in 2021.

All that matters here is the tax year that the withdrawal takes place. It can be December 31st 2020, and January 1st, 2021. What matters is that the $35,000 in income from the IRA withdrawal gets spread over 2 tax years.

And just this one move, relatively simple right? Ends up lowering their 2020 tax bill.

And of course they have this slightly elevated tax bill in 2021 also because there is an increase in withdrawals that year as well. But, in total their total tax bill over the next 2 years is just over $16,000. That is a $2,500 reduction in taxes just from spreading this expense out over 2 years.

Not a bad return from just a little bit of planning!

And so, I wanted to start with this example just to give you an idea on why planning around big expected expenses like a car can be so beneficial.

Now $35,000 cars might not be your thing, but I don’t think it is unusual for a newly retired couple to have some periodic jumps in spending, especially early in retirement. It might be a home renovation, it might be a year with a lot of travel, like we will all be due for after the coronavirus passes.

Or, it might be due to a year with increased medical costs. It might be the purchase of a new home or a second home, which as you can maybe imagine after the numbers from just a car purchase, a home purchase can really create some big tax bills. We have an example later with this presentation with this same couple purchasing a vacation home.

And so that was an example I was hoping would catch your attention on just how one time expenses, even somewhat modest expenses, can impact you.

So why do these big increases in taxes happen?

Causes for High Taxes in Retirement
Need help creating a tax-efficient withdrawal plan? Schedule a free, no obligation meeting to talk with us and see how we can help you!

The code laws have several cliffs, or areas where if you hit certain levels of income, you tax rate can increase rapidly.

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