Taxes in Retirement: 3 Key Things Retirees Should Know

Be one of a kind with Mike's Plan.

It's the One of a Kind Financial Show Daily with your host, Mike Milligan. Today is Monday, September 29th. It's the day after my birthday, guys. I turned 49 yesterday. I am now 364 days away from 50 years old. And man, it's hard to believe how these first 50 years have flown by in my life. With great success, many failures, but really a chance just to be one of a kind. And that's what I challenge people to do every day on this podcast when I meet with them face to face and in the Ideas by Mike podcast. Remember, tax season is when you and your accountant find out just how much the government enjoyed your success. Isn't that quote just absolutely amazing? Because taxes are that great historical document that you get to put down daily on paper about the income you made, a couple of You know, little expense reductions that the IRS gives you. And then, uh, and then you get to reconcile. Did you pay enough throughout the year or do you owe some more? Recently on the One of a Kind Financial Show, Gary and I talked about retirement tax planning, specifically about how Social Security gets taxed, required minimum distributions, which is the IRS's payback plan for the, for the incentive they gave you to be able to put money aside all those years. And then we talk about the widow's tax bracket. Enjoy this segment. Be one of a kind. We'll see you soon.

For retirees, the surprise isn't how much they've saved, it's how much they still owe. Now, the IRS is your lifelong partner, and in retirement, they often collect more than you expect. Pre-tax accounts like IRAs and 401s are fully taxable. Social Security benefits can be taxed. RMDs can push you into higher tax brackets. Now, in this segment, We're going to walk you through the main ways the IRS shows up in retirement and what practical steps you can keep more of your income, keep the IRS out of your pocket. And the first thing we're going to talk about is how Social Security gets taxed, Mike.

So, Gary, if your combined income is above $44,000 for married couples, according to the, the calculation to, to get to that, up to 85% of your Social Security is taxable. That tax torpedo happens when each additional dollar you withdraw from an IRA makes more of your Social Security taxable too. So there's, there's withdrawal strategies that can help smooth out this problem, like drawing from Roth accounts first, and maybe even delaying Social Security for a little bit of time to get some extra money out of your IRA, especially if longevity is something, is a risk that you're scared you will have in life.

Mm-hmm. Yeah, of course, you can start taking Social Security at 62. It maxes out at age 70. Most people think it maxes out at your full retirement age, which is around 67, but it keeps growing around what, around 5% each year, Mike? Something along those lines?

It does. It does up and through, up through like 62 to 67. And then from 67 to 70, it actually goes up about 8% per year.

Right.

From that full retirement age to that maximum retirement age.

Yeah. So if you can wait and everybody's situation is different, obviously, if you can wait, it definitely makes sense from a financial standpoint. But everybody's different. Everybody's one of a kind. That's what we talk about here on the show today. All right. The RMDs. I love this. The IRS Payback Plan.

Well, when, when 401s were established in the Revenue Act of 1977, it was basically— I mean, it was literally called the Revenue Act. It wasn't called like The Taxpayer Savings Plan for the Future Act, right? It was called how the government was going to, in the future, get some of your retirement. And so at age 77, the IRS requires withdrawals from all of your pre-tax accounts, whether you need the money or not. So for someone who has $1 million in an IRA, the first-year RMD is nearly $40,000, all taxable. This could push retirees into higher tax brackets and trigger the dreaded IRMAA surcharge. So, how can you avoid some of this with your RMDs if you don't need the money? Well, if you make gifts to charity, right? And it's just part of your normal daily process, like giving to your church or giving to the Salvation Army or giving to Elizabeth River Project or giving to, you know, one of our partners in Texas, right? To be able to actually help. Well, you should be giving from your IRA because the IRA distributions that go to charity are qualified charitable distributions. They can solve the RMD problem, not show up on your taxes, and the money you would have given to charity from your checking account, you still have it in your checking account. There's other strategies like that to delay RMDs out to 85 that we can discuss when we get together also.

You know, Mike, I'm not a whiz at math, but I do know $40,000 of $1 million is 4%. Does it go up each year as you get older when you're collecting those RMDs?

I mean, the IRS, would you expect anything less from them, Gary?

No, exactly not.

They, of course, like the older you get, the larger the factor becomes, or actually the smaller the factor becomes, the higher the percentage that you take out. So like in your 80s, you're taking 5%. If you're lucky enough to live into your 90s, you're taking out 6%, 6.5%. And when, as those percentages continue to go up, it'll push you through the— it'll push you through tax brackets. And so where maybe you retired in the 22% bracket, because of RMDs, you may end up in the 24%, 32%, or 35% bracket.

Right. So die early. No, no, I'm kidding. No, don't do that.

Don't take that advice.

Don't take that advice. The show is the One of a Kind Financial Show. I'm Gary Nolan, your consumer advocate, with us each week at this time. It's Mike Milligan. Mike is with One Oak Financial. I want to get you on the calendar, get you all set up with that comprehensive plan. There's no cost, there's no obligation. That phone number is 800-748-1838, 800-748-1838, or text the word IDEAS to 600-700. Do it right now. The folks at One Oak Financial standing by, ready for your phone call this weekend. What is the widow's tax bracket? What is that all about?

Well, you know, really it's going to hit us all one day, Gary. Those of us that are married are one day going to be filing a single return, right? One of us, one of the people in the couple is going to do that. So just to explain it a little bit, a married couple in 2025 can earn about $94,300 and stay in the 12% bracket. But for a widow filing single, that bracket ends at just $47,150. So the same income nearly doubles the tax rate. It takes it from 12% to 22%. So one of the things that we help do is realize by helping them see what their life and health expectancy is, when this widow's tax bracket's going to go into force. It means that we probably would do things like shift to Roth IRAs earlier by doing conversions, maybe using trusts to shield some income, or maybe even using life insurance for its tax favorability treatment of money that you can access. during your life if you need it. That's why it's called life insurance, right? Money you need during your life, but at the end, it passes tax-free to the next generation.

All right, Mike, up against the clock. Tell us about the One of a Kind Financial Plan.

Well, we at One Oak Financial have been really innovative in the space, in the financial planning and financial services field, because one of the things that we believe is taxes are the biggest expense you're ever going to have in your life. And if your financial plan is not addressing the tax burden that's going to come, especially those in retirement, of increasing tax brackets, well, you really don't have a financial plan. You have an investment account. And so instead of calling it the one-of-a-kind investment account, we call it the one-of-a-kind financial plan because we're going to address the problems that really matter: taxes, retirement income, long-term care, and your legacy. And when we address those 4 things in a well-written plan and then put it with your investment plan, All of a sudden, we have something that now is easy to follow and allows you to take stress and fear out of retirement so you can live a one-of-a-kind life.

Folks, there's no cost, there's no obligation. Get a better handle on your financial situation. Get that one-of-a-kind financial plan that Mike just talked about. It starts by picking up the phone and dialing this number: 800-748-1838. 800-748-1838. Or text the word IDEAS to 600-700.

One last message from our compliance team. As a reminder, Mike Milligan, Certified Financial Planner, is an investment advisor representative of Advisory Alpha LLC, an SEC-registered investment advisor. All opinions expressed by me, Mike, or any podcast guests are solely our opinions and do not reflect the opinions of Advisory Alpha. This recording is for informational purposes only, should not be relied on solely for investment, tax, or legal decisions, and it's in no way intended to communicate or guarantee specific performance or suitability of any security instrument or products, as we may have discussed. Investment advisory and financial planning services offered through Advisory Alpha LLC, a registered investment advisor. Insurance products are provided by Ideas by Mike, a licensed agency located in Norfolk, Virginia, and licensed to do business in all 50 states. While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal services. Please consult with your tax or legal professional prior to making decisions related to these issues. If you want us to— an appointment, With Ideas by Mike or One Oak Financial, please reach out via our website. This podcast is produced in conjunction with Mike Milligan, LLC.

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