Why due diligence is essential to avoid tax problems in retirement

Nobody likes to think or talk about taxes, but they need to be part of the conversation when you’re assessing your retirement savings strategy, says Carmen Trivisonno, CRPC, vice president at AXA Advisors, LLC.

“Take a client who has most, if not all of his or her savings wrapped up in a 401(k) plan or another pretax qualified retirement plan,” Trivisonno says. “When the time comes for distribution in retirement, this person might not have the flexibility to take larger withdrawals without having to deal with the tax consequences.”

Diversification is one of the hallmarks of an effective strategy to save money for retirement along with asset allocation and rebalancing, but taking these steps does not guarantee a profit or protection against loss.

“You put some money into this bucket for this purpose and you put some money into another bucket for a different purpose,” Trivisonno says. “When you take a more diversified approach, the goal is to be more capable of dealing with the tax changes that may come in the future.”

Smart Business spoke with Trivisonno about how to develop a strategy that gives you a better chance to avoid negative tax consequences in your retirement.

How can you put yourself in a better tax position with your retirement strategy?

The spacing and timing of distributions can make a big difference. If you know you need X amount of dollars and you need to draw that money from a pretax plan that will be taxable to you and you can space it out over two years, that’s always beneficial. Take as much of the withdrawal as you can without crossing into a new marginal tax bracket.

For instance, if the top of the 15 percent tax bracket is $78,000, you would want to withdraw just enough money by the end of December to get up to that $78,000. Whatever is remaining that you still may need should be deferred to the next year so you can space the liability over a couple years. If you’re already into your retirement and all your assets have been saved into a pretax vehicle, you can still use something like a Roth conversion or the partial conversion of a traditional IRA. You do that very strategically up to the top of the tax bracket so that you can start to build in more flexibility, even if you didn’t have a chance to do it in preretirement. The suitability of this strategy will depend upon individual circumstances, so you should consult with a professional tax advisor before taking action. You should also resist the urge to take a large withdrawal to pay off a big expense like your mortgage. Consider structuring it over the course of four or five years and minimize your tax burden while still paying off the mortgage in a reasonable time frame.

What if you’ve made some mistakes in your savings strategy?

Some decisions are difficult to reverse. You may have a real estate investment trust that has no liquidity or a long-term surrender charge on a variable annuity product where it just wouldn’t make any sense to take a withdrawal or rollover because of the penalties that would ensue. It’s difficult when there are product rules to navigate. But often when it’s a situation where you just don’t know why you have a particular product in your portfolio, you can make changes and put yourself in a better position.

What is the best way to plan for an uncertain future?

By being aware of how you’re saving money from a tax perspective and understanding how those investments work, you’re going to do better than somebody who is not paying attention to those things. As we look to the future, there is the potential that tax rates will go up. But it’s hard to say when that will happen or by how much they will increase. If circumstances allow, consider saving some money pretax and some aftertax that will become tax-free.

Insights Wealth Management is brought to you by AXA Advisors, LLC

Carmen Trivisonno offers securities through AXA Advisors, LLC (NY, NY, 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. Please be advised that this article is not intended as legal or tax advice. Accordingly, any tax information provided in this advertisement is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or the marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. AXA Advisors, LLC and AXA Network, LLC do not provide tax advice or legal advice. AGE-111121(2/16)(exp.2/18)