Create a Cash Flow Plan With Taxes in Mind

Ray’s Take When you head out the door on the last day of your job, you want to know that you've made a solid plan to take care of finances during your retirement years. And, even though that regular paycheck from your employer is out of the picture, Uncle Sam will still want his share of your money. Understanding the tax repercussions of distributions from various retirement vehicles and planning accordingly ahead of time can help you be more tax efficient in your planning.

The time to create a cash flow plan that will meet your needs in retirement is well in advance of that last day. Understanding the resources that you have available to meet your retirement goals is the first step in determining your retirement cash flow. 

The second step is to assess and manage the tax efficiency of the income you are collecting. This will help minimize the amount of income taxes you pay both now and down the road. All income is not created equally, and ultimately it’s not what you make but what you keep that matters. Capital gains and qualified dividends are taxed at lower rates in your non-qualified portfolio, but that doesn’t matter when they come from your qualified plan – all distributions are treated as ordinary income.

It is tempting to keep deferring qualified plan distributions as long as possible, but doing so can really bump up required minimum distributions later on. So a little “bracket management” can be useful. Finally, it’s important to remember that tax rates come and go, just like the politicians who write the laws. Don’t bet the farm that a given tax code will be in place forever. No one has a crystal ball. 

It’s important to spend some time understanding all your accounts, their tax status, distribution requirements and your options for handling them. Find a tax professional to ensure you are meeting the IRS requirements – and to help avoid a costly tax mistake.

Dana’s Take I like to think that between YouTube and a Google search I can figure out how to do-it-myself for just about anything. Retirement planning, unfortunately, with its tax and survival consequences, is not one those topics. 

The most important thing to keep in mind when planning for retirement, and preparing to spend your savings during retirement, is that your plan is a roadmap that should be put in place and updated on a regular basis. When you retire, you will have more time. So why not take the time to do things that will save you the thing you likely have less of – money. Nothing is set in stone, but with a solid plan you are putting yourself in a position of success.

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