Tax planning strategies for retirement

By Christophe Schipske, CPA, CFP®

As a firm that combines tax planning with investment management, Athlon Advisors strives to maximize your tax savings both now and in retirement with investment decisions that can be made year-round. With our Certified Financial Planners™ working closely with our Certified Public Accountants to place investment guidance alongside sound tax strategy, we offer a unique and valuable perspective.

Below are a few examples of how we help weigh and build strategies for our clients. Keep in mind that everyone’s situation is different and that our advice is structured to each individual and that no investment is guaranteed.

Comparing a Traditional IRA to a Roth IRA

This is a perfect example of the different perspectives a CPA and a CFP® will bring to the table. A CPA might encourage you to contribute to a traditional IRA each year because of the immediate tax break, whereas a CFP® might guide you toward a Roth IRA to maximize your tax savings later in your retirement years. Here’s why. Contributing to a Roth IRA doesn’t provide you with a tax deduction for the contribution the way a traditional IRA might. Instead, it grows tax-deferred until you begin taking withdrawals. Then, if withdrawn in a qualified manner, you pay no taxes on it then either!

Let’s take a simple example…

If you have the option of contributing $6,000 per year into a Traditional IRA and receiving a tax deduction on the full contribution and then investing those tax savings as well OR investing the $6,000 contribution into a Roth IRA every year, which one do you think would be better in the end?

Well of course we have to make the attorneys and regulators happy and disclose the assumptions first: This example assumes you start contributing at 30 years old and stop at your retirement age of 65 (i.e., making contributions for 30 years), you contribute $6,000 per year, receive a full tax deduction on the traditional IRA contributions and invest those tax savings, receive at 7% rate of return each year and have a federal tax rate of 22% during your contribution years and in retirement. Using these assumptions, the Roth IRA would be worth $887,481 and the Traditional IRA (after taxes) would be worth $830,625. The Roth IRA is worth $56,856 more!

Please remember to consult your tax advisor for your tax rates. Do not assume they are the same as above. In addition, the rates of return listed above are used for hypothetical purposes only and past performance is no guarantee of future results.

Utilizing a Bucket Strategy

A well laid out plan or strategy would include having funds in what we call “buckets,” which are various styles of accounts that have different tax consequences upon withdrawal. The various buckets might include accounts whose withdrawals are completely non-taxable, partially non-taxable, and/or fully taxable. Without having an appropriate mix in several of these buckets/accounts you would not be able to maximize your tax strategy. For example, without any taxable income in retirement, you would never make use of the IRS standard deduction, which is currently $12,400 for individuals and $24,800 for married couples filing joint returns.

Contributing to an Employer’s Retirement Plan

One of the taxable-withdrawal types of accounts that you may choose is an employer-sponsored retirement plan, like a 401(k). Typically these accounts are tax-deferred, meaning they grow tax-free until you make withdrawals, but at the time of withdrawal all or a portion of the distribution would be taxable. Imagine the compounded growth you can achieve if you let the assets grow untaxed for 30 or 40 years until you need them in retirement. Plus, what you contribute to your employer-sponsored plan will reduce your tax burden today, because those contributions are not considered income for that year. These are called pre-tax dollars.

Even better, some employer-sponsored plans offer an employer match, meaning that if you contribute from your own paycheck, your employer will match those contributions into your account. Oftentimes this is referred to as “free-money” from your employer. However, we all know nothing in life is completely free — most times you do have to make contributions from your own funds first and often times you need to continue to work for the employer for a certain length of time, called the vesting schedule, in order to receive the full amount of the employer match. Another tip here: You can fill both buckets when you fund a Roth IRA within your employer-sponsored plan and there are no income limitations that might prevent or limit contributions on Roth contributions through an employer plan.

Is all of this something the typical tax preparer would share with you? We mean no offense to them, but it’s likely not top of their mind.

Taking the Retirement Saver’s Credit

Depending on your income, the Retirement Saver’s Credit can reduce your tax liability for something you were already planning on doing anyway — socking away money for retirement. Put in basic terms, using just this one example (every household is different), if you are part of a married couple filing a joint return and have $39,500 or less of adjusted gross income in 2021 you can receive a credit of 50% of the contribution you make into an IRA or employer-sponsored retirement plan up to $4,000. So if you contribute $4,000 to an IRA, you can receive a credit of $2,000! For people making more in adjusted gross income, the percentage of allowable credit is reduced.

Tip: Tax credits differ from tax deductions because credits are dollar-for-dollar (not just a partial reduction). Using the example above if the couple made a $4,000 contribution they could see $2,000 of that contribution come right back to them in a check from the IRS.

Analyzing the Standard Deduction vs. Itemized Deductions

This can be time-consuming, so leave it to us to compare the pros and cons of each. We will run the numbers both ways to ensure the best bottom line when you take into account BOTH your federal and state returns. Just because your itemized deductions don’t add up to more than the standard deduction doesn’t mean you shouldn’t calculate your taxes both ways. You may end up losing a bit of your refund on the federal side, but end up making more than that difference on your state return. Any tax savings could free up some cash for investing, which you may still have time to do by investing in either type of IRA by the tax deadline.

We Help You Develop a Priority Order for Your Discretionary Dollars

Some might think it is prudent to sock away every extra dollar into retirement accounts in an attempt to reduce taxes (now and/or in the future) and plan for retirement. A CPA might even guide you toward that objective, but is that really the best advice if you haven’t even built an emergency fund?

Realistically, not everyone has unlimited expendable cash to achieve all their goals at one time. That’s when we put on our financial planner hats, to prioritize where the next dollar should go. Our guidance is based on the “Baby Step” approach developed by financial planning expert Dave Ramsey. This graphic shows you a suggested order of which financial goals to tackle first:

Dave Ramey's Seven Baby Steps Listed Out

This is where the approach we take is a holistic one. A CPA, from their perspective, might recommend that you prioritize Baby Step #4 if making those retirement contributions can reduce your taxable income in the current year. In comparison, at Athlon Advisors we look at both sides of the equation to see where you are with Steps #1 to #3 before making a recommendation.

In one possible variation on the Baby Step approach, you may still want to contribute to your employer-sponsored plan to get the matching funds. That doesn’t mean you should go after the full percentage match if it sacrifices not making progress in the other steps. We’ll talk you through the pros and cons to help you determine the percentage you should allocate from your paycheck while still working toward Steps #1 to #3.

In addition, with all of our plans we consider the right mix of how you can live comfortably now while also making progress on the Baby Steps. We aren’t here to make you miserable!

Athlon Advisors Develops the Long-term Vision

A key point to remember is that it’s not just what you earn, but what you keep. Comprehensive financial advice takes an advisor who places investment guidance alongside sound tax strategy, which can be difficult to find with advisors who don’t take a holistic approach. With our Certified Public Accountants working together with our Certified Financial Planners™ we can spot those opportunities for tax savings and the potential for improved investment growth when you consider all sides. We find the balance between money now and money down the road, so that you live well today and into your retirement years.

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