Tax Planning Opportunities Many Retirees May Miss: Why The Years Before and After Retirement Matter Most

This article is part of The Next Chapter, a video series from MAI Capital Management designed for pre-retirees navigating the transition into retirement. Each episode draws on candid conversations with MAI advisors about the decisions, emotions, and planning considerations that can shape retirement - financially and personally. Episode 3 looks at tax planning opportunities to consider before and during retirement.

When you're preparing for retirement, it's natural to focus on how much you've saved. But another important question is: How will taxes affect the money you've worked so hard to accumulate?

In the years leading up to and following retirement, your income, account withdrawals, and other aspects of your financial life may change. Thinking about those changes well before your final paycheck can give you more time to evaluate the tax-planning strategies that may be appropriate for your circumstances.

Tax Planning Can Start Years Before Retirement

Retirement planning isn't something that has to begin six months before you stop working. Decisions made several years earlier may affect the options available to you later.

Mark Van Drunen, CFP^®, Market Leader, Senior Managing Director, compares preparing for retirement to another major life transition:

"We spend months taking our children to find the right college for them. They have these pre-college experiences so that they can test it to make sure that they enjoy it and they like it. But we have nothing like that for retirement. It takes years to effectively plan for retirement."

Planning ahead can also give you more time to consider how unexpected events, such as a job change or health issue, could affect your retirement plans.

As Mark explains, "If you have a financial plan that has enough margin flexibility in it, it really can help reduce anxiety, so that you can now focus on you and your loved ones rather than worrying about whether or not you have the money."

The Tax System: A Labyrinth of Complexity

One of the challenges of retirement tax planning is that no one knows exactly what tax rates will look like years from now, or exactly what your personal tax situation will be.

That uncertainty makes it important to evaluate different scenarios rather than building a plan around a single assumption.

According to Kevin Liu, CFP^®, Managing Director, Senior Wealth Advisor, "The argument oftentimes is taxes are just going to go up over time. But if you look back over the last 40 years, the total effective rate of taxes has stayed flat. So it's incorrect to assume that taxes are just going to go up. Really, nobody knows. "

Depending on your individual circumstances, there may be reasons to pay taxes sooner or defer them until later. The important point isn't predicting future tax rates. It's understanding the choices available to you and evaluating how different scenarios could affect your retirement plan.

Think About Your Different Tax "Buckets"

One way to think about retirement assets is by considering when and how they may be taxed. For planning purposes, your assets might fall into broad categories such as:

• Taxable: Assets that may generate taxable income or gains along the way or when sold.

• Tax-deferred: Accounts such as traditional 401(k)s and IRAs, where taxes are generally deferred until distributions are taken.

• Potentially tax-free: Certain accounts or investments, such as qualified Roth IRA distributions or some municipal bond income, may receive favorable federal tax treatment when applicable requirements are met.*

According to Mark, "I love working with a client 10 years before their retirement. The reason being is we can start adjusting their tax buckets. They have assets that are taxed now. So as you rebalance, you're paying tax. Assets that will be taxed later when you pull money out (e.g., 401(k), IRA), and then assets that will never be taxed."

Why can having different types of accounts matter?

Your income and tax circumstances may change throughout your working and retirement years. There may be periods when evaluating strategies such as Roth conversions, realizing gains, or deferring income is worth considering. Required minimum distributions can also affect taxable income later in retirement.

According to Kevin, "We have to take advantage of these opportunities. What do we do when we're making that high income? We probably want to defer. And then once the low-income hits, we don't want to just wait around. We want to realize. And then once it comes back up again, we want to try to defer it again. So, it's the complexity and the labyrinth of the tax system that causes a lot of preemptive planning."

The appropriate approach will depend on your income, assets, tax situation, and broader financial plan.

Consider Taxes Before a Large Retirement Purchase

Large purchases can create financial decisions that go beyond the purchase price itself.

Consider someone who wants to buy a $500,000 home during retirement. If much of their wealth is invested, selling assets to fund the purchase could potentially create capital gains and other tax consequences.

According to Kevin, "It's common that clients come to us when they're retired, and they no longer are able to get a typical mortgage. And oftentimes their alternative is to go look at their portfolio and say, 'Well, I have to sell my assets, and I have to pay with all cash.' But that typically can generate a big capital gains tax bill."

Depending on an individual's circumstances, there may be other ways to evaluate liquidity needs, including certain forms of borrowing. Strategies such as securities-backed lending or other more complex approaches can involve interest costs, market risk, collateral requirements, and other considerations and aren't appropriate for everyone.

The larger takeaway is simpler: before selling investments to fund a significant purchase, consider how the decision could affect your taxes, portfolio, and overall financial plan.

Effective Tax Planning Requires An Integrated Team

Your investment portfolio is only one part of your financial picture. Tax decisions can intersect with retirement income, estate planning, charitable giving, and other considerations.

A financial advisor can help plan your overall wealth accumulation and wealth distribution, but oftentimes an expert, such as an accountant or CPA, is needed to help with tax planning.

That can make coordination among your financial advisor and tax and legal professionals particularly important.

Andy Meyer, CFA, CFP^®, Regional President, compares it to knowing when to bring in a specialist: "I kind of use the analogy: if you're a general practitioner, you're a doctor, you're going to be familiar with a lot of things, but there are times that you want to bring in a neurologist or a cardiologist just to make sure that we're doing everything that we can to optimize that situation."

Mark sees value in having those professionals communicating with one another: "It's advantageous for our clients because we have those people on our team and they can sit on the same side of the table. The attorney and the CPA can sit at the same side of the table as the client. So it's coordinated rather than these silos. When your CPA, your financial advisor, and your attorney are all rowing in the same direction, you're going to get to your destination."

Start With the Bigger Picture

Retirement tax planning isn't about predicting future tax rates or finding a single strategy that works for everyone. It's about understanding how your income, investments, retirement accounts, and other financial decisions may interact over time.

Starting those conversations five to ten years before retirement can give you more time to understand your options and consider potential trade-offs as your circumstances change.

In Episode 4 of The Next Chapter, we'll broaden the conversation to explore how investments, taxes, estate planning, insurance, cash flow, and family goals can fit together as part of your overall financial picture.

*Tax treatment depends on individual circumstances and applicable federal, state and local tax laws. Roth IRA distributions are generally tax-free only when applicable requirements for qualified distributions are satisfied. Municipal bond income may be subject to state or local taxes and, in certain circumstances, federal taxes. Consult your tax professional regarding your individual circumstances.

Important Disclosure

This content is for informational and discussion purposes only and does not represent investment, legal or tax advice. Consult your investment, legal or tax professional.

MAI Capital Management, LLC ("MAI") is an investment adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training