Created: March 3, 2022
Modified: November 2, 2022

Retirement Tax Planning Strategies for 2022

Many times you go online and you find these financial videos and they’re way too complicated. They use all kinds of jargon. People don’t understand. It’s almost like they’re trying to prove how smart they are by using all these fancy words. Well, one of the comments that we get all the time is we keep things nice and simple. It’s practical advice that you can take advantage of right now and today, we’re talking about, now that it’s tax season here in 2022, some of the ways or some of the things that you need to be thinking about when it comes to minimizing taxes.

When I say minimizing taxes, I don’t mean minimizing taxes today. Yes, we want to do that, but also you’ve always got to keep an eye on; “Am I minimizing taxes over my lifetime?” Especially, when you’re in retirement. Sometimes, we get shortsighted or maybe you’re even working with a tax professional that gets shortsighted and says, “Hey, let’s defer taxes today.” But you might be increasing your lifetime tax liability. Just keep that in mind. But today, we’re really focusing on right now, the taxes that you’re going to have to file for 2021 here in 2022, and let’s see what we can find here when we’re talking about ways to minimize or at least things to be aware of.

First of all, when President Trump was in office, they passed a bill. Now whether you like President Trump or not, it’s okay. Doesn’t matter. It’s not what we’re talking about right now. What we’re talking about is the tax cut that went through when President Trump was in office and it was a boon. It was a real advantage for a lot of people, despite what was framed by one particular political party. And again, this is not a political statement, this is just the reality. People that were making less than $60,000 a year saved a ton of money in taxes. I have a son that makes about $65,000 per year. His tax bill went down by 60%, 60% savings. Why was that?

Explanation of Trump Tax Cuts

Well, one of the reasons was because they raised the standard deduction. For many people this year when they file for 2021, the standard deduction for a single individual is over $12,000. And for a married couple that’s filing jointly, it’s around $25,000, so that’s a huge standard deduction. What does that mean? That means just for breathing and for filing a tax return, a single person gets to deduct $12,000 off their income. $12,000 they don’t have to pay any taxes on. Again, the married couple $25,000. The first $25,000 of your income if you’re married, is completely tax-free.

Now it used to be, in order for us to get big deductions, we had to file what’s called a Schedule A. That’s where you itemize your deductions and what the new tax law says is that a lot of people will no longer want to file that Schedule A because they’re getting a massive deduction just by using the standard deduction. All right. It’s really important that first of all, it’s important you don’t do your own taxes. In my opinion, you ought to maybe you can use a software program like a TurboTax or something like that, but it doesn’t cost that much money to go and have your taxes prepared. It may cost a few hundred dollars, but I think it’s a few hundred dollars well spent if you get the right tax person, because they can keep you aware of what’s happening in the future and the things that you need to prepare for this year. So there’s my little plug on getting the tax preparation, but you can now decide which one of these standard versus Schedule A deductions to file for.

And again, for those that are of modest income, kind of middle class to maybe slightly below middle-class income, it’s a huge boon. I mean, there is a possibility that somebody’s making $60,000 a year household income, maybe they’re married, maybe they’re not, but if they’re married, hardly any of their income is getting taxed so you want to make sure you understand this.

Deferring Required Minimum Distributions (RMDs)

What about deferring distributions? Let’s say you’re retired and you’re taking income. One of the questions you have to ask yourself is, should I take income out of my qualified plans? Out of that 401k, that IRA, that 403b, 401a. All these different types of plans where you’ve deferred taxes, and now you have the opportunity to take taxes out and pay the taxes on the money… Excuse me, take money out and pay the taxes on the money as you take it out.
There’s not one answer for everyone here. Some people should defer those accounts for as long as possible. Others should start taking money out earlier. And here’s a little bit of a rule of thumb for you. It’s not absolute, but it’s a rule of thumb. And what it says is that the more money you have, maybe you should start taking money out of your qualified plans earlier, because the more money you have, the more you might leave something to kids, grandkids, nieces, nephews. And if you leave them qualified accounts, under the new rules, they’ve got to take all that money out over a 10-year period. Don’t want to get too technical here but what I’m saying is, just examine whether you should pull money out of those retirement accounts or you should defer the distributions on those retirement accounts. And now we’re getting a little more complicated, which is why you really need a tax professional that again, can look out over your lifetime tax liability, not just this year.

Tax-Free Income

What about tax-free income? A few years back, I converted a lot of money over to Roth IRA so when I retire and I don’t plan to retire, if at some point I retire and I want to trigger income, I have the opportunity to take tax-free income, or I could take income from my qualified plans. I’ll have that choice every single year. If you’re still working, you might want to position some money so that you can have tax-free income in the future. And if you’re not working anymore, you might want to position some money to generate or create tax-free income that could come out of a Roth IRA. It could come from tax-free municipal bonds or a municipal bond fund. It could come from a certain real estate where you’re getting income that’s generated because of the way real estate is taxed. You don’t have to pay tax on that income right now. Explore the opportunities for tax-free income.

Retirement income

Though we’ve talked a little bit about retirement income already, again, when you’re taking retirement income, you want to be thoughtful about where you are taking it from. If you’re taking a pension and Social Security, you don’t have a lot of opportunities to change the taxation of those accounts if you’ve already triggered them. But you can think a little bit about what are you doing with the rest of your qualified plans. What are you doing with your other money? For instance, let’s say you have a stock account. You can sell stocks and pay capital gains rates on stocks instead of ordinary income that you might pay on interest or pulling money out of your retirement plan.

Again, I said at the beginning of it, that people like these videos because they’re really simple and we talk in simple language, it’s really hard to do that when it comes to the tax code. The tax code is ridiculous. It’s ridiculous how many pages it is. Every time Congress makes a change, it gets bigger and bigger and bigger. This does get technical but so far, we’ve talked about the standard deduction versus filing a Schedule A and itemizing deductions, deferring your distributions from your retirement accounts. You might want to do that. Creating tax-free income. Everybody loves tax-free income, and also the retirement income that you take, you’ve got to think about all these things and pension and social security and what the timing is on those.

Age-Based Taxes

Let’s talk about age-based taxes. For some of you, the way you’re setting up your retirement income or the way you did in the past, you’ve created a tax time bomb for yourself. What do I mean by that?

Well at age 72, we know that we have to start taking money out of our tax-deferred retirement plans at age 72. Used to be age 70 and a half. Now, it’s age 72. And what happens is many times if you’re a good saver, you don’t need to take that money out and so you’re creating this tax time bomb for yourself. You’re creating a situation where maybe you’ve got a good retirement income. Let’s say you’re living on $100,000 a year in retirement, and you got a bunch of money in that old 401k. And now you hit age 72 and you’re living off the 100,000. You don’t need more, but you’ve got maybe a million dollars in that 401k and now all of a sudden about $40,000 comes out and that adds to your taxes. And then the next year, it’s more. And the next year, it’s more. And the next year, it’s more. And you’re creating this tax time bomb for yourself.

Before you’re 72, you want to look at this and possibly convert some of that money over to a Roth, or maybe freeze the growth on that by taking some income out of those particular plans. Again, a lot of complexity here, but don’t create this tax time bomb for yourself.

Utilizing Tax Buckets in Retirement Planning

The last thing I want to talk about, we’re going to talk about these buckets and I think this gives you a good visual of the different types of taxes. Again, we talked about specific strategies and things to think about here, but let’s talk about these buckets a little bit. Think of the money and think of money fitting into four different buckets when it comes to taxes. We have money that gets taxed now. It gets taxed today. Those would be mutual funds, CDs, anything that’s getting taxed today. It might be obviously your earned income. It could be distributions from retirement plans if you’re getting taxed on them today. Anything that’s getting taxed today, we call that the Now bucket, and traditionally, what you want in the Now bucket is money that you’re going to need to spend, I would say, over the next three to five years, okay? Now maybe you can take some of that money out of retirement plan distributions, but again, think of the Now bucket as three to five years of expenses.

The next bucket we’re going to talk about is the “Later Bucket”; Things that get taxed later. This would be 401ks. If you’re contributing to 401k, you’re not paying taxes on that earnings now. You’re going to pay taxes on that later so that’s our Later bucket.

The next bucket is Tax-Free. This would be things like withdrawals from Roth IRAs. It could be tax-free municipal bond interest from a municipal bond fund or municipal bonds. It could be withdrawals from life insurance. If life insurance is structured a certain way, you can do withdrawals that are tax-free. These are tax-free things. And all of the tax planning is sort of what can we push out to the right? Okay? What can we take from the Now bucket money we’re paying taxes on now and push it over to where we’ll pay taxes on it later? What can we take from these two buckets and push them over so we’ll never pay taxes on the money? And this gives you a concept to say, “Well, not only is this about saving taxes today. It’s about strategically moving money to the right where maybe it’s tax-free.”

Estate Tax-Free Bucket

You’ll notice there’s a fourth bucket over there, and this is money that’s estate tax-free also. Not too long ago, my wife and I set up a trust and we gifted money into that trust and it’s irrevocable. It can’t be changed so that money is not in our estate anymore. When we pass away, when the second of us passes away and there’s an estate tax due not only in the state that I live in but also from a federal standpoint, that money will not get counted at all in that tax calculation. Again, good tax planning pushes money over to the right in these four buckets. Again, this is such a complicated subject. I know it’s a complicated subject. I know we’ve touched on a lot of things here, but what it should really do is get you thinking. And again, just to tie things up here, just to wrap things up, the idea is, don’t create a tax time bomb for yourselves by doing things today that create more problems in the future. Yes, it feels better to save a few bucks in taxes today, but it might not be the right thing.

2022 Financial Changes to Be Prepared For

Be aware of the changes that happened with the Trump tax cuts. Be especially aware and if you take anything away from this, I want you to take these four buckets away and think about how can you push money over into the buckets, to the right. Obviously, you don’t want to impoverish yourself. Obviously, you don’t want to make a gift into an irrevocable trust and not have enough to live on and that’s why it’s really important to get the advice of a financial professional that can do projections for you to minimize your lifetime taxes and make sure you have enough taxable income. Don’t forget to subscribe to this channel. Don’t forget to click on that little bell icon so you get notified every time we upload a new video.

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