The Largest Overlooked Section Of Retirement Budgeting

So, you've been saving for retirement throughout your employment years, taken advantage of matching programs, have a healthy and robust 401(k) or Roth IRA, and feel confident that you will be prepared when your traditional income ceases.

You've considered the changing expenses you may face, such as medical costs and leisure expenses. You've drafted a working budget that outlines the costs of maintaining your lifestyle. You may still even have an emergency fund with a few thousand dollars set aside in a savings account separate from your retirement accounts.

However, one area is frequently glossed over – with frustrating consequences.

The gut wrenching reality is that this area could have been on your radar all along, but it is not discussed with the same fervor as retirement healthcare or end-of-life financing.

Taxes In Retirement

First and foremost, when you think of taxation in retirement, you probably realize that your tax bracket is likely to change. What many people overlook, though, is the fragile relationship between income/assets and annual taxes.

It may be a completely new phenomenon to meet April 15 head-on and feel a strangling incentive to decrease your tax liability – not because you wish to take advantage of the deductions and credits available, but because you financially need to.

Where To Look For Tax Reductions

Location, Location, Location: If you are considering moving in retirement, look at the benefits of relocating to a tax-friendly local. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming all enjoy no income taxes. Tennessee and New Hampshire also enjoy the status of "tax-friendly" by not having a traditional state income tax; however, these two states do require taxation on dividends and investment income, sometimes referred to as "hall taxes."

Investments: Principal at Kaufaman, Rossin & Co., CPA Scott Berger, said of investments and retirement, "It's all about monitoring adjusted gross income, so the most obvious solution to reduce the tax burden is tax-free bonds or tax-free investments." Keep in mind that while traditional bonds are taxed as income, dividends and capital gains are taxed lower than your typical income. Furthermore and most noteworthy: Municipal bonds (in general) are tax-exempt. While there are always exceptions, it is worth being aware that you can seize control over your assets and use tax-efficient investing. Consider the benefits and drawbacks of where you hold your investments, whether in a taxable account or tax-deferred/tax-free account.

Related Link: Can You Afford To Retire?

Life Insurance Policies: While considering this option will reduce your overall death benefits, your life insurance policy may allow tax-free distributions. These can be used then to supplement your retirement income.

Tax Breaks: And of course, don't forget to take advantage of the common tax deductions and credits for which you may qualify. These include, IRA charitable contributions, saver's credit, medical/dental expenses, retirement plan contributions, investment expenses and your standard deduction. Tax preparation may take longer if you wish to take advantage of these, but it could reduce your taxable income significantly; when you are living on a fixed income, the extra time and effort will pay for itself.

Keep in mind that you are entitled to these deductions, credits and methods of reduced taxation. Reducing taxes in retirement can be an unexpected hurdle, but there is help available. Consider the benefits of enrolling the help of a professional financial advisor if you have questions regarding retirement planning and the new obstacles you may face. You do not need to sacrifice tomorrow if you plan today.

Your financial future is in your hands; use all the tools available to most efficiently equip yourself.

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The Largest Overlooked Section Of Retirement Budgeting

Taxes In Retirement

Where To Look For Tax Reductions

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