Broker Check

Focus on Retirement: 4 Potential Tax Traps to Avoid In Retirement!

| July 11, 2018

Happy Summer and Happy Dog Days!

Catherine and I recently returned from a trip to Toronto where we spent most of a week in that fair city with about 24,000 of our Rotary Family for the 2018 Rotary International Convention. It was a very memorable experience.  During our time there we had the opportunity to learn what Rotary is doing with their partners around the world combining the empowerment of women with international peace building efforts. We learned much about the international state of clean water and sanitation and how important both of those are to peacebuilding and community development.

We were also fortunate to have several extremely high caliber speakers from around the world.  These included the Prime Ministers of Haiti- Dr. Jack Guy Lafontant, and Canada- Justin Trudeau, former Prime Minister of New Zealand- Helen Clark, former First Lady Laura Bush, the Chief of the Mississauguas of the New Credit First Nation-Chief R. Stacey LaForme, the Director General of the of the World Health Organization-Dr. Tedro Ghebreyesus as well as numerous members of Rotary International's Leadership team.  Their message was one of continued progress and hope for a better future. 

Catherine and I go to these events because we are committed to the causes that Rotarians all around the world support, i.e. the eradication of Polio, promoting peace, fighting disease, providing clean water sanitation and hygiene, saving mothers and children, supporting education and building local economies.  Last year's Convention saw the announcement of a pledge of over $1.2 billion to finish the eradication of polio.  This year another announcement of almost equal import was that Rotary and the country of Haiti had entered into a 12 year plan to provide clean water and sanitation to every citizen in Haiti by 2030!  We were so humbled to be a small part of this enormous effort. We returned home re-energized in our commitment to serve others and help (in our small way) to make the world a better place.

By now I suspect you are wondering how this fits into the topic of tax traps in retirement. Well it doesn't!  I wanted to share this with you because it is something that we are passionate about and that is something that ties into this month's topic.  Being passionate about something in retirement is key to making sure that you truly enjoy the career you have after you leave the work force.  For Catherine and me, that career will continue to include serving others, just as we do now in our chosen careers.

One thing we know now, just as surely as that great American Icon Benjamin Franklin knew in 1789 when he made the statement, is that taxes are here to stay.

“Our new Constitution is now established and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

Taxes, whether federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes or alcohol are a part of life today just as they were in (maybe more so!) at the founding of our great experiment. We can’t escape taxes. However, we can learn what the rules are and strive to pay exactly what is required and not one penny more!

If you have already retired, you are aware that taxes don’t end when retirement begins. For those who are nearing retirement, it is important to recognize, plan for, and minimize the tax bite that may await.

Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor. That said, let’s get started.

1.  Estimated quarterly tax payments may be required

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck. When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.

You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.  If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty. Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me and together with your tax advisor we can help you prepare in advance!

2.  Social security may be taxed

If you file as an individual and your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.   If the total is more than $34,000, up to 85% of your benefits may be taxable.

If you file a joint return and you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If combined income is more than $44,000, up to 85% of your benefits may be taxable. ( Benefits Planner: Income Taxes and Your Social Security Benefits). 

Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security.

3.  Beware of the required IRA minimum distribution

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.  This is your money and you should take it when you are required to do so! 

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.   However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

As an aside, required minimum distributions are not required from a Roth IRA, nor are the distributions subject to income tax.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.  The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

If you do not need the income, there are ways to gift the RMD to a charity that will allow for you to get credit for the RMD but not show the donated amount as income.  This is a fairly advance planning technique that we can work on together with your tax advisor to maximize your philanthropic desires, meet your distribution requirements and lower your taxable income!

4.  The hidden cost of selling your primary residence

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.  If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist. Please email me at or call me at 850-776-9209 and we can talk.

Table 1: Key Index Returns




3-year* %

Dow Jones Industrial Average




NASDAQ Composite




S&P 500 Index




Russell 2000 Index




MSCI World ex-USA**




MSCI Emerging Markets**




Bloomberg Barclays US

Aggregate Bond TR




Source: Wall Street Journal,, MarketWatch, Morningstar

MTD returns: May 31, 2018-Jun 29, 2018

YTD returns: Dec 29, 2017-Jun 29, 2018


**in US dollars


Many believe that in the short term, the market is trying to push higher. The tech-heavy NASDAQ Composite, and key measures of mid-sized and small companies touched new highs in June (MarketWatch data). Much of the underlying momentum can be traced to faster economic growth, rising corporate profits, and still-low interest rates.

Another factor that lends support–S&P 500 companies repurchased a record $189.1 billion of their own shares in the first quarter, according to S&P Dow Jones Indexes Senior Analyst Howard Silverblatt. He expects buybacks to remain strong through the rest of 2018.

But the Dow Jones Industrials and the S&P 500 Index failed to recapture their January highs. These indexes are made up of the nation’s largest companies, some of which derive a significant share of sales from overseas.

Though not far from the January highs, a strong dollar may be putting modest pressure on these stocks. Moderation in overseas growth may also be a factor. It could be that much of the uncertainty stems from escalating trade tensions between the U.S. and its major trading partners.

Free trade/fair trade–it’s a very complex issue that’s being fought with simple soundbites. The administration believes America has not been treated fairly and is using its authority to selectively levy tariffs against offending nations.  It’s a risky strategy that may eventually break down barriers. Or, it could escalate into a series of retaliatory measures that impede the U.S. and global economy.  As with most things in the market, we will just have to be patient and wait and see.

A quick review of the economic data strongly suggests the noise from the trade headlines isn’t affecting the U.S. economy, and GDP growth in the second quarter appears poised to surpass 4%. Whether that trend continues remains to be seen.

You may agree or disagree with the administration's actions. But the market, which is collectively made up of millions of large and small investors, hates heightened uncertainty. Tit-for-tat levies increase short-term economic uncertainty.  Currently, it has injected volatility and uncertainty into the headline-grabbing major averages. Like many obstacles that will crop up, I believe this will eventually pass.I hope you’ve found this review to be educational and helpful. As always, I’m honored and humbled that you take the time to read my posts.  If you have any concerns or questions, please feel free to reach out to me.  Please remember that we are looking to serve not just you, but your friends and family members who may have similar needs, goals and objectives. A referral is the absolute best compliment I can receive!   Kind Regards, Rudy