More spendable income!

Income Allocation Reduces Your income Tax Bill

Figuring out the U.S. tax code is no easy matter, but the key to understanding is the phrase “income tax.” You’re taxed on income, and not wealth (at least for now) or asset values.

Let’s consider the tax treatment of the major sources of retirement income:

  1. Withdrawals from a rollover IRA are subject to federal and state income taxes.
  2. Social Security payments (with some exclusions) are subject to federal and state income taxes.
  3. Interest on corporate bonds are subject to federal and state income taxes.
  4. Interest on Treasury bonds are free of state income taxes.
  5. Interest on Municipal bonds are free of federal income taxes.
  6. Qualified dividends are taxed at rates lower than on interest from corporate bonds.
  7. Annuity payments (but only a portion for the first 15 or 20 years) are subject to federal and state income taxes.

Items 3 through 7 all have their unique payout rate, and when combined with their different tax treatments, can make the process to optimize your spendable income quite complex. Well, our Income Allocation planning does the analysis for you — and increases income and lowers taxes. You got it right: more income and lower taxes. By the way, by our selecting the right combination of income sources, you also have lower risk.

Let me give you one example. With Income Allocation, a 70-year-old male with $2. million in savings, (30% in Rollover IRA) plus $3,500 per month in Social Security benefits, can generate $162,000 in income while an investor who is advised to focus only on the asset side will generate $110,000 in income. And despite the $52,000 advantage in income, they will both pay the same amount in taxes — or $14,500.

To make up the difference, the asset allocator has to generate capital gains at the unrealistic rate of 6% per year on a consistent basis. Or liquidate savings at that rate.

Bottom line, a retirement income plan should consider income taxes.

Click here to create your own plan for retirement income. Or contact me for a conversation about how to find these tax benefits.