PLANADVISER - July/August 2018 - 18

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Taxes Can Derail Retirement
Minimizing the government's take is key
government can assess taxes on up to
85% of Social Security benefits, contingent
on combined income and other
factors such as marital status.
At the state level, taxes on retirement
income will also vary considering
the participant's sources of annual
income. Currently, 13 states levy their
own taxes on Social Security.
" Generally speaking, states in the
South tend to have lower taxes than
states in the North, " notes Sandra
Block, senior editor at Kiplinger. " That's
why a lot of people like to move to
Florida-there is no income tax there. "
There are many planning opportunities
to take advantage of today from
a tax-optimization perspective, even
for those in their 20s, 30s and 40s,
experts agree.
The first step to mitigating future
expense, according to Angie
tax
O'Leary, head of wealth planning
at RBC Wealth Management, is to
consider diversification with respect
to account types and their prospective
tax requirements. Plan sponsors,
for their part, can establish a Roth IRA
option.
According to D'Ordine, particiAS
more American workers are
expecting to rely on defined contribution
(DC) plans and
individual
retirement accounts (IRAs) to fund
their retirement years, concerns are
growing about how to best manage
lifetime income streams.
As part of this effort, according
to Daniel D'Ordine, founder of DDO
Advisory Services, late- and even midcareer
retirement savers should start
doing much more advanced planning
for how they can minimize income
taxes in retirement. Depending on
where they live and how they have
structured their retirement income,
retirees may find themselves paying
unexpectedly high taxes each year
to both the federal and state governments,
D'Ordine warns.
Should an individual's retirement
income stream stem mostly from Social
Security, he would be unlikely to pay a
great deal of income tax, D'Ordine says.
However, if the person has accumulated
other significant income sources
such as a 401(k) or defined benefit
(DB) plan, then taxes will be assessed
on what is commonly described as
" combined income. " Depending on
how the public and private sources
of income are structured, the federal
pants often have questions about the
tax burden associated with annuities.
Those who buy a lifetime annuity with
a lump sum of money are guaranteed
to receive a set, predictable payment
throughout retirement, but how will
this be taxed?
" Annuities add some security and
take a bit of the pressure off, " D'Ordine
says. " Much of the monthly payment
in this case will be considered return
of premium, but the rest of it will be
taxable. There is a lot to consider. "
For participants retiring early, who
may need income before
claiming
Social Security benefits, D'Ordine
mentions the possibility of purchasing
a limited-term annuity, say a fiveyear,
where a majority of the money
received monthly is considered return
of premium. -Amanda Umpierrez
18 | planadviser.com july-august 2018 Art by Brian Rea
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PLANADVISER - July/August 2018

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