There’s one thing we can all agree on: Nobody enjoys paying taxes.
We work with families who have $1 million or more saved — we call them Midwestern Millionaires. They’re the kind of people who pack their lunch, pay off their home and try to do things the right way.
For those who have spent decades saving, serving and doing the right thing, sending painful amounts of money to Uncle Sam to pay taxes can feel downright unfair.
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When you have a high income and a high net worth in retirement, then taxes will likely be your greatest expense.
Tax avoidance, not evasion
I get it. One of our clients, Jeannie, looked me straight in the eye during our first meeting and said, “Joe, there’s one thing you need to know about me — I hate taxes.” That moment inspired my bestselling book I Hate Taxes (request a free copy here).
And, honestly, she’s right. You shouldn’t feel bad about wanting to keep as much as you can of what you earned through all your years of hard work.
Let’s be clear: I’m not talking about breaking the rules. I’m talking about using them to your advantage.
As Judge Learned Hand famously said, “Anyone may arrange his affairs so that his taxes shall be as low as possible … There is nothing sinister in so arranging affairs as to keep taxes as low as possible.”
That is exactly what smart tax planning is about: paying your fair share, but not a penny more — and not tipping Uncle Sam.
The IRS has a plan for you. Do you have a plan for you?
Here is the truth most retirees don’t realize: You already have a tax plan — it’s set out for you by the IRS.
If you don’t take control of how and when you pay taxes, the government will happily make that decision for you by imposing required minimum distributions (RMDs).
Creating your own retirement tax plan now can allow you to decide when and how much to pay in taxes.
Plus, you can structure your retirement income so more goes into your pocket and less goes into Uncle Sam’s.
Taxes are on sale — for now
When clients ask me, “Joe, when’s the best time to plan for taxes?” my answer is simple: right now.
If taxes were going to double over the next 10 years, would you do something today? Of course. And with our national debt now over $38 trillion, that future isn’t hard to imagine.
That’s why I say taxes are currently on sale, and like most sales, this one may not last forever.
When you shop at the grocery store, you check prices before putting items in your cart. But with tax-deferred accounts, most Americans are shopping blind.
Every time you add money to your 401(k) or traditional IRA, you’re agreeing to pay taxes later, but you don’t know how much “later” will cost.
Would you invest in something if you didn’t know the price? Of course not, and that’s why understanding your future tax liability is so crucial.
Now, as I always say, the tax code is written in pencil, which is why we must proactively plan for what we call tax diversification.
Three tax buckets
We teach our clients to think of their savings as being in three buckets:
Here is the goal: to move money from the “tax later” category to “tax never.” I always ask, if we had a magic wand, which bucket would we want our money in? The tax-free one, of course.
Unfortunately, most people have the majority of their wealth in tax-deferred investments. So, typically, what they do is contribute to a Roth from their taxable bucket.
Or they look at doing Roth conversions by moving a portion of their tax-deferred bucket to the tax-free bucket and paying taxes now while they are lower.
You can’t take it with you
You’ve worked hard, you’ve saved, you’ve done everything right … Now it is time to ask yourself, What is all of this for?
I tell people all the time that there will be no U-Haul hitched to your hearse. You can spend your money, give it to your family, give it to charity … or give it to Uncle Sam.
If your retirement plan is structured properly, you can live comfortably, give generously and still leave a lasting legacy without giving the IRS a tip on your way out.
Smart tax planning
The IRS is very good at making taxes complex, but your strategy doesn’t have to be.
With tactical and intentional planning strategies — using Roth conversions, charitable giving, income diversification and more — you can cut your tax bill, strengthen your retirement and put more of your money toward what truly matters.
At Peak Retirement Planning, we believe that every dollar you save in taxes is another dollar that can serve your family, your community and your legacy.
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