The first step in planning your retirement is to determine your income needs. You need to calculate how much money you will need after taxes to maintain the lifestyle you desire.
After establishing your income requirements, we'll then evaluate your expected social security income, income from your tax-deferred accounts, and income from your tax-free accounts.
The idea is to structure your income so that you are not getting more in taxable income than your standard deduction to avoid having 85% of your social security income is subject to income taxes.
As we discussed earlier, you basically have three buckets for your money. 1) Taxable accounts. Things like CD's, money market accounts, investment accounts, or any other accounts that generate 1099's and are currently taxable. 2) Tax-deferred accounts. This includes IRA's, 401-k's, 403-b's, or any other accounts that grow tax-deferred. 3) Tax-free accounts. This includes Roth IRA's, permanent life insurance, and income-producing real estate.
Our fundamental approach is to help you get to where you are in a zero tax bracket so as to insulate you from the inevitable income tax increases that we know are coming down the pike.
The basic strategy is to have the bulk of your post-retirement income come from tax-free Roth IRA distributions and tax-free withdrawals from your permanent life insurance policy. The idea is to keep the amount of money in your tax-deferred accounts small enough that your Required Minimum Distribution (RMD) does not exceed the amount you are allowed to earn before your social security income is taxed.
RMDs are taxed as personal income, so your RMD withdrawal could cause you to move into a higher tax bracket. Furthermore, more of your Social Security benefits could be taxed and you could lose out on certain deductions and credits tied to your modified adjusted gross income, and you might pay higher premiums for both Medicare parts B and D.
Distributions from your Roth IRA and tax-free loans from your permanent life insurance policy are not counted as income when calculating your Social Security benefits which is why you want the bulk of your post-retirement income from those sources.
Follows is a video I made for a prospective client discussing the benefits of converting an IRA to a Roth and adding an Indexed Universal Life policy to the estate.