Top 10 Mistakes When Planning for Retirement

#8 Poor, Unintegrated Tax Planning

by David D. Holland


During my twenty-three years in the financial industry, I have not met a single person (regardless of their political persuasion) who wants to pay more in taxes than they have to. They might want you to pay more, but, not themselves! It strikes me as curious, then, how often taxes are overlooked – or misunderstood – by investors in their retirement planning.

Here are some of the “Not-so-smart” taxes moves I’ve seen:

• Getting a home mortgage just for the tax deduction – It’s a tax deduction not a tax credit (and I’ll trade you a quarter for a dollar any day of the week).
• Liquidating an IRA to pay off a mortgage or other debt – Money is best
drawn from IRAs, 401(k)s and other tax qualified accounts over time instead of in large lump sums (the key is to avoid a big spike in income, which subjects the amount withdrawn to a higher tax bracket).
• Withdrawing money from IRAs, 401(k)s and other qualified accounts before
59½ – Instead, either draw money from other accounts until age 59½ or take advantage of one of the exceptions to the 10% tax penalty.
• Ignoring the impact that other income can have on Social Security benefits – depending upon where, when, and how money is drawn from other sources of retirement income, as much as 85% of Social Security benefits could be subject to income taxation.

And, here are some “Smart” taxes moves to consider:

• Investing in lower turn-over mutual funds in a regular (taxable) brokerage
account, and using higher turn-over funds inside of tax-deferred accounts like IRAs and 401(k)s, is usually better – The higher turn-over means that the fund manager trades more often and, as a result, investment gains could be short-term and taxed at a higher rate; however, it doesn’t matter whether the gains are short or long inside the deferred accounts because all the gains are usually treated as ordinary income when they are taken out.
• Drawing income systematically from IRAs (even if it is not needed) to
expose it to a lower income tax bracket, before being forced to withdraw it by the IRS, can be a smart tax move.

Here’s the bottom line: The best way to minimize taxes is to focus on them and to make them an integral part of your retirement planning. (Of course, if this is not important to you, please feel free to send in an extra check for me!)





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David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to