One of the most common frustrations I hear is not about paying taxes. It’s about being surprised by them.
Most people don’t mind paying what they owe. What they don’t like is finding out after the fact that better planning could have reduced the bill, or at least made it predictable. That frustration usually comes from treating taxes as a once-a-year event instead of an ongoing planning issue.
A lot of tax challenges come down to timing.
Why timing matters more than most people expect
When income shows up can matter just as much as how much shows up. This becomes especially important in retirement, when income is coming from multiple sources and there is less flexibility to simply earn more to offset a tax hit.
Traditional IRAs are a good example. While you’re working, they can be incredibly effective. You defer taxes, let the account grow, and reduce your current taxable income. The issue often appears later. Once required minimum distributions begin, you may be forced to take out more money than you actually need. That additional income can push you into higher tax brackets and create a larger tax bill than expected.
Roth conversions and the importance of looking ahead
Roth conversions get a lot of attention because they shift when taxes are paid. At their core, they are a timing decision. You are choosing whether to pay tax now or later.
In some situations, smaller Roth conversions in your early 60s can make sense, especially before required distributions start and before Medicare premiums are affected. The key is that this decision needs to be coordinated with everything else, not done in isolation.
I’ve seen situations where a conversion looked smart on paper but caused Medicare premiums to increase by hundreds of dollars a month. Once those premiums are triggered, there is no easy way to undo them. That is why timing and coordination matter.
Why tax planning cannot be done once a year
Tax planning works best when it happens throughout the year. With my clients, we look ahead at required distributions, set up appropriate withholding, and run projections before year end. That allows us to evaluate options like charitable distributions, loss harvesting, or adjusting income levels before it is too late.
Knowing where things are headed in December is very different from finding out in April.
The goal of tax planning
The goal is not to avoid taxes altogether. That is not realistic. The goal is to avoid unnecessary taxes and surprises that come from decisions being made too late.
If you are not sure what your future tax bill looks like, or you want more control over how and when taxes are paid, let’s review your situation.
Doug Hepburn is an Investment Advisor Representative of and offering securities and investment advisory services through Cetera Advisors LLC, a broker/dealer and a registered investment advisor, member FINRA, SIPC. Cetera is under separate ownership from any other named entity. Home office address: 508 Elm Avenue, Suite 100, Phoenixville, PA 19460.
Some IRAs have contribution limitations and tax consequences for early withdrawals. Distributions from Traditional IRA and employer sponsored retirement plans are taxes as ordinary income and, if taken prior to reaching age 591/2, may be subject to an additional 10% IRA tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. For complete details, consult your tax advisor or attorney.
Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Cetera Advisors LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal