Important Tax Aspects To Consider Before and During Retirement

 

Last posted by Robert Chittick | LNHlink

If you’re saving for retirement, you are most likely accumulating dollars in one or more of the assets (buckets) listed below. It’s important to consider how long you may need this money to last. Today, a male and female in good health who reach age 65 can expect to live to age 84 and 86, respectively. Keep in mind those are just averages. One in four 65 year-olds today will live past age 90. Making the most of your retirement savings is important to maintaining your standard of living throughout retirement. Your money needs to keep working for you even when you no longer can.

One factor that can significantly impact the amount of money you have available in retirement is taxes. Here we’ll take a look at how your money is taxed at key ages before and after retirement.

 

Pre-Tax/Tax Deferred

401(k), pensions, traditional IRAs, etc.

Dollars are contributed BEFORE taxes are paid, and you will not pay taxes as the money grows. Taxes will need to be paid when you access these funds, ideally in retirement. Because you don’t pay tax on what you contribute to this bucket, there are limits on how much you can contribute, and there are additional tax penalties if you withdraw the money prior to 59½.

PRIOR TO AGE 59½

You pay ordinary income tax and a 10% penalty on withdrawals.

AFTER AGE 59½

Any tax-deferred (pre-tax) assets become taxable at ordinary income tax rates.

AGE 62

If distributions cause you to exceed modified adjusted gross income (MAGI) limits, up to 85% of Social Security benefits are taxed.

AGE 65

Medicare Part B premiums could increase to $428.60/ month if MAGI exceeds limits.

AGE 70½

Required to take minimum distributions from tax-deferred assets. This will increase your taxable income.

 

After-Tax/Taxable

Stocks, bonds, mutual funds, etc

The assets in this bucket are contributed with after-tax dollars. Because taxes have been paid, there are no limits on how much money you can contribute to this bucket. Any appreciation will be taxed when you sell the asset while any dividends or interest will be taxed in the year they are received.

PRIOR TO AGE 59½

Taxes on growth are generally payable upon the sale of the asset; dividends or interest generally taxed in the year received at either ordinary income or capital gains rates.

AFTER AGE 59½

Taxes on growth are generally payable upon the sale of the asset; dividends or interest generally taxed in the year received at either ordinary income or capital gains rates.

AGE 62

If distributions cause you to exceed MAGI limits, up to 85% of Social Security benefits are taxed.6

AGE 65

Medicare Part B premiums could increase to $428.60/ month if MAGI exceeds limits.

AGE 70½

No Required Minimum Distributions.



After-Tax/Tax Deferred

Non-qualified annuities

The assets in this bucket are contributed with after-tax dollars. However, you will not pay taxes as the money grows.

PRIOR TO AGE 59½

Withdrawals from deferred annuities are taxable to the extent of gain (earnings) on the contract at the time of the withdrawal and are subject to a 10% penalty. Withdrawals in excess of the gain in the contract are a non-taxable recovery of basis.

AFTER AGE 59½

Withdrawals from deferred annuities are taxable to the extent of gain (earnings) on the contract at the time of the withdrawal. Withdrawals in excess of the gain in the contract are a non-taxable recovery of the basis. Upon annuitization, annuity payments received are partially taxable based upon the applicable “exclusion ratio.”

AGE 62

If taxable distributions cause you to exceed MAGI limits, up to 85% of Social Security benefits are taxed.

AGE 65

Medicare Part B premiums could increase to $428.60/ month if MAGI exceeds limits.

AGE 70½

No Required Minimum Distributions.

 

After-Tax/Tax Favored

Cash Value Life Insurance, Roth IRAs

The premiums you pay into a cash value life insurance policy are paid with AFTER-tax dollars. The cash value that accumulates supports an income tax-free death benefit that will be received by your beneficiaries upon your death. You do not pay tax on the growth of the cash value. Distributions from the policy via withdrawals and loans are generally not income taxable. Roth IRAs have favorable tax characteristics but also limits on how much can be contributed. In addition, if your modified adjusted gross income (MAGI) exceeds $135,000 for single filers and $199,000 for joint filers you are ineligible for a Roth IRA.

PRIOR TO AGE 59½

You can access cash values on a tax favored basis without penalty. Withdrawals up to cost basis are nontaxable. Policy loans are nontaxable as long as the policy remains in force until death.

AFTER AGE 59½

You can access cash values on a tax favored basis to supplement your retirement income. Withdrawals up to cost basis are non-taxable. Policy loans are nontaxable as long as the policy remains in force until death.

AGE 62

Non-taxable distributions from a life insurance policy DO NOT impact Social Security benefits.

AGE 65

No impact to Medicare Part B premiums.

AGE 70½

There are no Required Minimum Distributions for cash value life insurance and cash values can continue to accumulate.

 

Consider the impact taxes have on your retirement

 

Life insurance provides important death benefits for your family to replace income that would be lost upon your death. What you may not realize is that permanent life insurance, especially cash value life insurance, can provide an extra layer of versatility to complement the income you receive from traditional retirement assets.


The purpose of this material is to discuss the value and versatility of permanent cash value life insurance as a potential source of supplemental income to meet a variety of lifetime contingencies and needs. It is not intended to suggest that life insurance is necessarily superior to other assets designed to provide retirement income, nor is it intended to recommend the liquidation of existing retirement accounts in order to fund a life insurance policy. Rather, it is to suggest that life insurance can be used to complement and supplement traditional sources of retirement income.

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