Perspective: Near retirement? Pay attention to tax changes

There have been quite a few changes in tax law and IRS rules over the past few years that could affect individuals close to retirement. The latest proposed change is a new bill dubbed “Secure 2.0” currently sitting in Congress aimed at increasing retirement security. Provisions in the bill, as it stands now, include an increase to catch-up contributions and raising the required minimum distribution (RMD) age. As with any proposed bill, these provisions are in flux as the bill passed the House and now sits in the Senate.  

So, what happens when the rules change? 

It’s important to remember that change is inevitable. Having a plan in place is the first step to knowing how and why new rules and tax law changes could impact your future. However, just because the rules change, doesn’t necessarily mean you need to change your retirement strategy. Here are some important elements of a successful retirement strategy: 

Timing Social Security 

Navigating Social Security can feel overwhelming, especially when there are literally thousands of rules under the Social Security Act. The timing of your Social Security benefits is dependent upon your personal financial situation. If possible, it is usually advantageous to delay benefits for as long as possible due to the increases offered every year between 62 and 70. This is something I frequently model out for my clients to help them understand how these benefits fit into their larger financial picture. 

Account Distributions 

Money flows are the first concern when your paycheck stops. Making sure you are pulling income from the right accounts, especially in the early years of retirement, is crucial. Choosing to withdraw from a Traditional IRA/401(k) verses a Roth IRA/401(k) can have a large impact on your taxes and the longevity of your savings. The right approach differs for each person and is dependent upon your living expenses as well as legacy and estate goals. The proposed increase in RMD age could potentially give retirees more time to lower their future taxable income and RMDs through Roth conversions and allow for flexibility to switch assets to tax-free options. 

Flexibility 

If the last two years have taught us anything, it’s the importance of being flexible. Determining the right balance of liquidity and flexibility in your personal finances allows for flexible decision making when needed. This is usually a direct result of investment diversification and risk management. 

Risk Management 

Identifying potential risks is key to insulating your retirement plan. That being said, knowing and understanding your own risk tolerance is the key to plan execution. Utilizing a risk assessment tool (we use Riskalyze) can help to strategically align your risk tolerance with your financial plan so that you are comfortable and confident. It can act as a guide to taking on the right amount of risk in the accounts you draw from early on in retirement with the possibility of being more aggressive in other accounts to hopefully encourage growth. It also can prevent knee-jerk reactions (and potentially detrimental decisions) when facing economic or legislative changes. 

Professional Guidance 

As mentioned previously, change happens. New laws get passed, inflation rises, and unexpected pandemics occur. Sometimes, for the good or bad, retirement comes earlier than expected. I frequently run custom financial models for clients who are retirees or close to retirement to help them visualize and map out scenarios for potential shifts and changes. Having a reliable and trusted professional team that works well together can give you and your family peace of mind when entering your next chapter. 

Developing a retirement strategy should not be entered into lightly. It should not be avoided, either. Whether you are counting down the days or think you will never stop working, it’s never too early to think about the future.  

Cody Demmel, CFP® is a Financial Advisor with Morton Brown Family Wealth, an SEC Registered Investment Advisor. Cody builds collaborative relationships with clients while building portfolios and financial plans to help them meet their goals. He can be reached at [email protected] or 610-709-5072.