Money Matters USA Financial Advisors

Tax Efficient Distribution

Tax Efficient Distribution

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The new Tax Cuts and Jobs Act of 2017 offers significant opportunities for middle income retirees and soon to be retirees to benefit from the important changes to tax brackets and tax rates. Do you know how these changes will impact you?

Given changes to standard deductions and the elimination of personal exemptions, how should you decide which accounts to harvest income from and when?

The new law did not change the interactions between different income sources in retirement which means that retirees will need to pay careful attention to which accounts they withdraw income from at which points in time.

If a taxpayer has only Social Security benefits and no other income, those benefits will be income tax free. A Social Security benefit will be taxed only in the presence of other income. If Social Security is taxable depends on the total amount of other income on the tax return, which includes IRA, 401k withdrawals, capital gains and even otherwise non-taxable municipal bond interest.

So how did we get a 55.5 percent effective tax rate on the additional withdrawals under the old system and 49.95 percent under in the new? How do the two systems compare?

Under the old system, a $5,000 withdrawal triggered ordinary income tax at 15 percent, creating $750 of federal income tax. This caused $4,250 of Social Security to become taxable as ordinary income, creating additional tax of $637.50. The combined $9,250 of additional taxable income pushed $9,250 of capital gains out of the 0 percent bracket and into the 15 percent bracket creating an additional $1,387.50 of federal income tax. In total, withdrawing the extra $5,000 from an IRA triggered additional tax of $2,775.

Under the new tax act, a very similar process is a work. The $5,000 withdrawal would trigger ordinary income at 12 percent, creating $600 of additional tax. The withdrawal would cause $4,250 of Social Security to become taxable as at 12 percent for another $510 of tax which pushes $9,250 of capital gain out of the 0 percent bracket and into the 15 percent bracket for an additional tax of $1,3876.50. In total, the extra $5,000 withdrawal triggered additional tax of $2,497.50.

The above example is intended to illustrate while the goal of the Tax Cuts and Jobs Act was to provide tax savings and simplifying the tax code, retirees who have multiple income streams should be acutely aware that making smart decisions about which income streams to use at which points in retirement can have a massive impact on their total tax bill. Furthermore, the interactions between the different types of income streams for middle income people is not where most tax professionals make their money. They make their money on their bigger corporate clients who will have major questions as the bill creates significantly greater changes for corporation’s and self-employed people.

Our firm understands and is equipped with tools to help you make sense of the changing tax landscape.

Download our new updated Tax Guide for the perplexed. Schedule your complementary appointment to review your tax and income situation.

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Our purpose is to help people determine a baseline for their longevity and to review their retirement planning.

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We charge a flat fee paid quarterly. Our initial fee is paid in two installments. We don't require assets to be managed by us.

MoneyMatterUSA, Advisory LLC operates only in the state of NJ. No offer may be made or accepted from any resident outside the state of NJ.

MoneyMattersUSA, Advisory LLC and Foundation Insurance Services, LLC are independent companies with common ownership. Advisory services are offered through MoneyMattersUSA, Advisory LLC and Insurance services are offered through Foundation Insurance Services, LLC; Frederick Saide Financial Advisor. Frederick Saide is not connected with or endorsed by the United States Government, the federal Medicare program, Medicaid program, or the Social Security Administration.