Tax Forward Planning for Your Retirement Investments

December 15, 2022


If you’re nearing retirement, then you are likely familiar with your income taxes and how much you can expect to deduct and pay each year. 

But once you retire, do you know how much of your income will be spent towards paying taxes?

When you’re planning (and budgeting) for retirement, it’s important to consider how much you’ll pay annually in taxes to ensure you don’t outlive your savings. Unlike during your career, these taxes will not be automatically withheld from your paycheck. You can pay different amounts of taxes depending on the types of retirement savings accounts you withdraw from.

Let’s take a quick look at two types of investments: Qualified and Non-Qualified.


A qualified investment refers to an investment account that you can deposit pre-tax dollars into. These investments grow tax-deferred over time. That means that when you withdraw money from those accounts, they are then subject to taxation on the entire amount. Types of qualified investment plans you may have heard of are 401ks, traditional IRA, Employee Stock Ownership Plans (ESOPs), Profit-sharing plans and other employer sponsored benefit programs. An employer who provides these plans must follow the Employee Retirement Income Security Act (ERISA) guidelines which are in place to protect an employee’s assets.

When you reach the age of 72, you must begin withdrawing minimum amounts, known as Required Minimum Distributions (RMDs), from your qualified accounts. The SECURE Act in 2019 increased the age to 72, whereas prior to 2019, it was 70 ½ years old. These distributions are subject to taxation.  

If you decide to withdraw any money before the age of 59 ½, otherwise known as an early withdrawal, you may be subjected to a penalty PLUS taxes owed. 

Did you know? Your Social Security benefits are not taxable if you are only takingSocial Security benefits and not receiving any other income. However, for most people, theirSocial Security benefits won’t cover their expenses each year during their retirement. Most people plan to use their qualified investments as an income stream. However, depending on the amount of income you withdraw, your Social Security benefits may become taxable. You must compare your income to the IRS income thresholds to determine if your Social Security benefits are taxable. A financial advisor should be able to advise you on how much you can or should withdraw while also advising you on the potential tax consequences.

Next, let’s look at what a non-qualified investment is and why it may be beneficial for your retirement.


In contrast to a qualified investment, a non-qualified investment is done with after-tax dollars. Most non-qualified investments fall into two categories: employer-sponsored or private.

Non-qualified investments generally do not have limits on contributions, unlike some qualified investments. These types of accounts are often beneficial for highly paid employees to save more for retirement. Although the options for nonqualified retirement plans are almost endless, the employer sponsored plans can generally fall into four types: executive bonus plans, split-dollar life insurance plans, deferred-compensation plans, & group carve-out plans. Usually, these investments are not protected if something happens to an employer. For example, your assets are not protected if your employer goes bankrupt. Employer sponsored non-qualified investments are considered to be assets of the employer and can be seized by creditors of the company.

The most common types of private non-qualified investments are checking, savings and brokerage accounts. Annuities are also classified as a non-qualified investment. Brokerage accounts and annuities are only taxable on earnings. This means that when you receive money from selling off stocks or receiving income from your annuity, you would only be required to pay taxes on the capital gains or interest of your accounts, not the entire amount received. If you paid taxes on the entire amount, you would essentially be paying double taxes.

Unlike qualified investments, there is no Required Minimum Distribution (RMD) for non-qualified investments when a person reaches 72 years of age. This means you can access funds immediately or at any age. For many people, this can give them peace of mind that their retirement savings could be spread out for longer if they or their spouse lives longer than expected.

An important factor to consider with these investments is how you will receive this income when you retire. You could find yourself liable for a large tax payment if you took the amounts in a lump sum. This differs from annuities which will spread out your tax liability over time since you receive the income over time, not all at once.

There’s a lot of myths and misconceptions about retirement and tax brackets. Most people believe that when they retire, they will be in a lower tax bracket than they are now. As you get older, you have less deductions you can claim from dependents or contributions to retirement accounts. If you have done a good job saving or investing, it is likely you can withdraw a substantial income per year to do all of the things you have dreamed of doing.

People often find themselves in what we call a tax torpedo in these situations. Depending on the total income amount taken from your qualified investments and Social Security, you could be surprised by the large tax bill you are now liable for. This becomes a significant challenge for people when they have done a good job of saving and want to enjoy their retirement but don’t know how to best manage their diversified income.

If you’re feeling confused right now, you’re not the only one. Less than a quarter (23%) of Americans have a written retirement plan, 40% have done some planning but do not have a formal one, and 37% have done no planning at all. It’s no surprise that many Americans are too overwhelmed to make a financial plan, especially when there are so many factors that come into play. You may have concerns like: What if my spouse lives much longer than me? Can I still afford to donate to charities while I retire? How much do I need to retire so that I can leave an inheritance to my beneficiaries? Can my ex-spouse still claim my Social Security benefits? How do I reduce the income taxes I owe in the future? Can I plan to be in the lowest tax bracket while retired?

Unfortunately, there is not a “one-size-fits-all” answer to each of these questions. Each individual who plans to retire has a unique set of circumstances that can greatly change the approach they may need to take when it comes to managing their money during retirement. 

So what can you do?

You can put in a long-term, systematic formula for reducing income taxes throughout your retirement. A big part of that is tax forward financial planning. The financial decisions you make can greatly influence your future tax obligations. CPAs are really good at looking in the rear view mirror. They are especially skilled at looking at what has happened over the year so that you are not missing deductions and that you are not paying more tax than you actually owe. We believe that you also need a team to be looking to the future of what your income can look like into retirement. A tax forward approach to your financial planning may significantly increase income and reduce taxes owed during your retirement.

At Sound Planning Group, our approach to retirement planning is largely based on tax forward thinking. Every person’s retirement situation is so unique that there is no perfect retirement plan or investment plan that works for everyone. It’s our job as a fiduciary to look at your needs, your desires and your relationships so that we can help you live out your retirement years the way that you want.

If you would like to receive in-depth advice about the different types of accounts available, discuss what distribution option is best for your needs, or if you would like for someone to help you manage your accounts, please schedule a Discovery meeting with a financial advisor today: 425-821-9442.

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