3 Critical Tax Planning Errors Sabotaging Your Florida Retirement

Benjamin Franklin is said to have once said: “Nothing can be said to be true except death and taxes” This is true, but that is precisely where financial planning can help you since there are various tax benefits that most Americans need to take advantage of.

 

 

Contrary to what some may believe, tax benefits are not secret formulas or ‘Tax Loopholes’ that the IRS is unaware of They are legitimate provisions that the IRS is fully aware of and encourages people to use.

 

 

The great reality is that the IRS knows perfectly well that they exist, and in many cases. They wonder why more people do not use them if they are perfectly legal.

 

 

So, if part of your dream is to retire on the paradisiacal beaches of Florida. Enjoy the tax benefits this state offers, or have an independent retirement in the state of your choice.

 

I have experience as a financial planner who provides services hourly.

 

 

 

One of the main advantages of my professional activity over other financial advisors is that while most advisors only review your investments, working as an hourly financial advisor allows me to see an infinite number of different cases and very different families throughout the USA, particularly in Florida.

 

 

Therefore, in this blog, we will share the 3 most common mistakes made by people who are preparing for retirement or who are already retired and forget to consider tax optimization.

 

1st Mistake: Forgetting Required Minimum Distributions (RMD)

 

 

The vast majority of people have been diligently saving and investing their money in a Traditional 401K account. Which allows you to have your contributions deducted from your taxes.

 

 

But remembering Benjamin Franklin’s words, you will have to pay taxes at some point in the future. If you ever wanted to leave that money there. Thinking that you would not have to withdraw it, the IRS will force you to withdraw it when you turn 73 or 75. Depending on your date of birth.

 

 

 

This is precisely what is called RMD, or Required Minimum Distributions.

 

 

For this, the IRS uses a table that tells you the amount you must withdraw from your Tax-deferred accounts (Traditional 401K, 403B, or traditional IRA). And that withdrawal enters your tax return as if it were income.

 

 

 

Many people do not consider this factor. And suddenly, when they are over 75 years old, they start paying taxes that are almost higher than those they paid when they were in their prime working years.

 

 

As if the sudden tax burden at 75 isn’t enough, the amount you’re required to withdraw grows over the years. This means that many retirees find themselves paying even higher taxes at 80, a situation that could have been avoided with proactive planning.

 

 

Most importantly, this tax time bomb could have been prevented. By planning ahead and considering your tax bracket in the years leading up to your mandatory withdrawals. You could have significantly reduced your tax burden in retirement.

 

 

 

ROTH Conversion is a possible solution to optimize your tax impact

 

 

Have you ever wondered if there’s a way to defuse the tax time bomb? The ROTH Conversion strategy might be the answer.

 

 

While it’s not a magic bullet for everyone, it can be a game-changer for those with a hefty chunk of their savings in a 401K or Traditional IRA. It allows you to withdraw income from these accounts at the lowest tax bracket of your life.

 

 

Therefore, they want to convert these assets by moving them from their 401K or Traditional IRA account to a ROTH IRA account. And paying the taxes today so they do not have to wait for Uncle Sam to tell them how much they should withdraw.

 

 

Of course, like everything that has to do with taxes, there are a series of considerations that you should consider to determine if a ROTH Conversion strategy is favorable for you. And even to know what amount you should withdraw each year.

 

 

 

This is where a Certified Financial Planner who provides hourly services has the technical tools necessary to run the various scenarios to prevent you from making costly mistakes.

 

 

 

 

For example, in some cases we see that some people watched a YouTube video on how to do a ROTH Conversion. And decided that they were going to withdraw a significant amount from their Traditional 401K. But then they saw that their Medicare premium went up substantially. Or that perhaps they were enjoying the subsidy of a health policy from the Affordable Care Act or Obama Care.

 

 

That is why it is always important to rely on a specialist for this type of strategies so as not to have a negative impact.

 

 

 

2nd mistake Not knowing which retirement account you should withdraw your funds from

 

Let’s say that over the years, you have been diligently saving for your retirement. Perhaps you have worked at several companies. And have several traditional 401K accounts. And over time, you opened a ROTH IRA account and a taxable investment account.

 

 

First of all, it is really complex to have several traditional 401K accounts because surely each one comes from a different employer. And perhaps because they are with different brokers or custodians, they have very different investment portfolios.

 

Then comes the time when you have to start withdrawing money from your retirement accounts, but you ask yourself:

 

 

• • Should I withdraw first from the accounts with tax-deferred benefits or from the taxable investment accounts?

 

• • What type of investment should I sell first, from bond stocks or a combination of both?

 

• • When is the best time to sell and not feel like I withdrew my money for my retirement at the worst time when the stock market was going down?

 

 

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Let’s look at the general guidelines that we usually suggest to our clients who hire our financial planning service:

 

 

One of the first steps is to consolidate all your Traditional 401Ks into a single account, a Traditional IRA, to avoid any tax impact. Remember that as long as you transfer from one Traditional account to another. That movement is not considered a withdrawal of funds. And you will not have to pay taxes on that transaction or “Rollover.”

 

 

Afterward, it is important to make a list of all your investments that were in your Traditional 401. And understand how the structure of your new portfolio turned out, including how much is in stocks and bonds.

 

 

The idea is to determine if the assets you have are the ones that really suit you.

 

 

For this, you should review the expense ratios and composition of each investment and create a clear recipe for the portfolio that will lead you to the independent retirement you want to have. All with a correct proportion between risk and return, according to your investor profile.

 

 

 

 

This same process should be applied to all your accounts, whether taxable or tax-deferred (401K, 403B, IRA). Think of your investment portfolios as cars that are there to take you to the destination you want to reach. If your destination is retirement, the recipes or compositions of each portfolio should be similar.

 

Now comes the big question: Which of these retirement accounts should you withdraw money from first?

 

While there are several general rules, like everything in the world of personal finances, it will depend on your particular characteristics. However, you could apply the following methodology.

 

 

Try to withdraw from your taxable retirement accounts first. You will most likely have some capital gains because you bought your assets at a lower price, and the current price has increased.

 

These capital gains will be taxed lower than you usually pay on interest income or salary.

 

 

 

 

In addition, you will allow your tax-deferred accounts to continue to grow without having to pay taxes until you have to pay them. When you make withdrawals from them, such as a 401K, 403B, or Traditional IRA.

 

 

Then, withdraw from your tax-deferred accounts, remembering that they are considered income and you will pay taxes on them.

 

 

Some people may not need to withdraw from their 401K, 403B, or Traditional IRA accounts because they may be producing income from other sources, such as rentals. Or have taxable investment accounts large enough that they do not need them.

 

 

But remember that, depending on your date of birth, the IRS will require you to make mandatory withdrawals from your tax-deferred retirement accounts when you turn 73 to 75. Even if you don’t want to, and you will have to pay taxes that could be pretty high. We invite you to read this blog if you want to learn about some ROTH Conversion strategies.

 

 

Finally, try to leave your ROTH IRA or ROTH 401K account as your last resort. Since we are talking about a retirement account that, after certain conditions are met. Will grow without paying taxes, and when you withdraw the money, you will not have to pay taxes either.

 

 

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Now comes the other question: How do you know when to withdraw money from your retirement account?

 

We all know that no matter how much you watch the news or listen to the best economists in the world every day. It is impossible to know if this is the best time to sell, so financial planning plays a vital role.

 

 

Instead of withdrawing all the money you will need at one time. You can schedule the amounts you will need per year and divide that amount into several parts. Such as quarterly, and know that each quarter. You must make the sale of those amounts without predicting what may happen in the market.

 

As you can see, this type of strategy involves a series of variables that can be complex. Especially if it’s your first time implementing a financial plan in this way. In such cases, it’s always wise to consider hiring a Certified Financial Planner who provides hourly services.

 

 

They can help you run different scenarios, providing you with the experience of working on these issues every day.

 

 

 

3rd mistake: not having a liquid fund for your retirement income

 

The stock market has performed wonderfully in recent years. We could say that it was not like that during the year 2020 of the pandemic or in 2022. But excluding these two years, they have grown substantially.

 

 

Therefore, many investors have preferred to have 100% of their assets in the stock market. Looking for this growth to continue, but as time has taught us. Stocks go up and down and what is called volatility is normal.

 

 

On the other hand, various studies show that every so often a recession will come and the markets will tend to go down. Which would not be a problem if you are working. Receiving a continuous income and simply wait for the market to recover over time. Or perhaps even decide to invest a little more to take advantage of the moment.

 

 

 

The problem arises when you are no longer working and need to sell part of your portfolio to supplement your spending. Because your Social Security check will not be enough in most cases to cover 100% of your spending.

 

At that time you will not want to sell if the market is going down. But since you need the cash flow, you will be forced to make this sale. That is where the suggestion is that you have an emergency fund or coverage that can sustain you for a year.

 

 

To calculate the amount you should have in this fund. You can take your monthly basic needs spending and multiply that amount by 12 months. You can leave one month in a traditional bank account and the equivalent for the remaining 11 months in a High Yield Saving Account or a Money Market. In order to take advantage of the high rates that currently exist.

 

 

 

Investors who do not apply these strategies and decide that they want to have all their money invested in their Traditional 401K when they are already retired. May have to sell at a very low price. But they will also have to pay taxes on the amount they are withdrawing, which could make the problem twice as bad.

 

In conclusion

 

Tax issues along with retirement projections always bring a number of variables that are really complex and much more so in these times of changing regulations. This is where a Certified Financial Planner who provides hourly services can serve to validate. Or give you a reasoned second opinion with numbers on which is the best path to follow.