July 24, 2018

WTOP Interview: The Truth About Taxes in Retirement

LISTEN NOW! Your taxes in retirement may be a lot more complicated than taxes while you're working.
Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Interview Transcript:

Hillary Howard: 5:11. Taxes are a fact of life, even in retirement and how much you'll be required to pay could have an impact on your lifestyle. Whether you're just beginning this new chapter or you’re already there. It's really important to understand the potential impact taxes could have.

Shawn Anderson: And joining us to talk about it, Dawn Doebler, co-founder of Her Wealth and Senior Wealth Advisor of The Colony Group in Bethesda. Great to have you back Dawn.

Dawn Doebler: Thanks Shawn! 

Shawn: Okay, so as we mentioned on wtop.com, your piece is trending pretty well, lots of people want to know about this. Retirement is a big transition, so if someone is planning to retire in the near future, what should he or she consider when it comes to taxes?

Dawn: Well Shawn, I wrote this article with one of our tax advisors because I've noticed lately that new clients are coming to see me because they're bumping into tax issues during retirement. And this is really surprising them. So, this week's article has several questions to ask yourself. And the questions point to the reasons that taxes tend to be an issue in retirement.

So, first: retirement is a time when income changes. Often substantially. So ask yourself, “how will my income change?” And second: think about what complexity may arise. If you have two working partners, ask whether you have different ideas about when you each will retire. And here I'll add a note that another trend I'm seeing is that many married couples are managing their money separately. And that may work during your working years but it can cause tax issues when you transition to retirement. And that's because regardless of how you pay your bills or think about your money, if you're legally married, the IRS views you as a married couple and what you do will affect your combined taxes. And retirement is a time when you start drawing on your investments. Which assets you use impact your marginal tax rate and that affects how much total tax you pay.

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Hillary: A lot of people are choosing to work part time instead of going cold turkey and not working at all; what do they need to know? 

Dawn: Well Hillary, that's a great idea to transition using part time work. We have three questions in the article you should be asking yourself if you're doing this. 

  1. First, how will you pay for health care? If you plan to reduce your hours, you need to understand how that will impact the cost of your health insurance. We've talked before about using HSAs for medical costs, keeping in mind that once you take Medicare, that's not available to you. 
  2. Second question: can you contribute to a retirement account? The answer usually is yes, and we prefer you continue to do that as much as possible. 
  3. And thirdly: should you rollover your retirement accounts to an IRA? Once you fully retire, you may choose or may be forced to move assets out of your company plan. A lot of people don't know that you can also often take an in-service withdrawal before you retire. 

Shawn: Okay, so it's not just your own investments, we've got Social Security that's in the mix. How does that affect a retiree’s tax bill?

Dawn: That's right Shawn, we have a lot of information about this in the article. But if you're retired and receiving Social Security, you want to reconsider how that extra income affects both your overall tax rate and your capital gains tax rates, especially if you're selling assets to fund your spending needs. And if you're not careful you can end up with an income level that triggers taxation of your Social Security. Very simplistically, if you are married with income over $77,000, then 85% of your Social Security benefits are taxed.

And in the article, we talk about ways to prevent this, by gifting you're required distributions from IRAs to charity. If you're retired and deferring Social Security, we have guidelines in the article. And I just want to wrap by saying that this is really a lot more complicated than I’ve made it sound today in our short segment. So, if you're nearing retirement, go to the article and certainly seek advice if you have a complicated situation.

Hillary: Alrighty. Thank you Dawn. That's Dawn Doebler with The Colony Group. Read more at wtop.com, search Her Wealth.

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Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.