5 Top Tax Questions For Retirees In 2023

Hello, and welcome into Mr. Stillman's Opus.

Glad to have you on the podcast. We are looking ahead to 2023 and talking about the five top tax questions that retirees need to answer this year. I know we're all making the list early in 2023, John, and taxes always have to be near the top, right? Well, it's one of those things where I feel like I'm talking out of two sides of my mouth because I'm always harping on the difference between tax planning and tax preparation. Tax preparation is the thing, you know, where you're filing your tax return, you're telling the IRS what happened to the previous year and reconciling your bill, essentially, which is different from tax planning, which is, hey, let's look ahead. Let's figure out how to be as efficient as possible, not only this year with our taxes and the year coming up, but in the future years, what can we be doing now to position ourselves?

So those, as you can see, are two completely different things. But people, it's hard to get somebody's attention on tax planning in September. And so usually we have to, while taxes are on everybody's mind in the spring, even though they're thinking about tax preparation, we have to use that as a way to say, okay, well, now that you're thinking about it, let's do some tax planning for the future.

Perfect. Well, that's what we're going to do today on the podcast. If you have questions, you can call or text John at 800-545-2991. And again, these are just five important ones. There's many, many more to address when you sit down and meet with your financial advisor. But these five today will hopefully get you thinking and helping you get in a better position for taxes, both in 2022, when you follow those and also ahead for the rest of the year as you look forward towards retirement.

All right. First question today we want to get answered is what are the tax implications of withdrawing money from my retirement accounts? Well, I'm going to assume that we're talking about somebody who is retired and by retired, I'm assuming they are beyond the age of 59 and a half.

So we don't have any penalties. But when you withdraw money from your retirement accounts, it's going to count as ordinary income. So if it's an IRA, 401k, anything where you have not yet paid the taxes, every penny that you pull out is going to be taxed as ordinary income. Now, it's theoretically possible that you could take a little bit of money out of an IRA and still not pay taxes.

How is that possible? Well, because you have a standard deduction on your taxes, right? And so if you took out so little and that was the only income you had for the year, then you could in theory take it out without paying taxes.

And we have some clients where we're playing those games. But it's a pretty small sector of the population that that would apply to. So in general, understand that every penny you pull out will be taxed as ordinary income at whatever tax bracket you happen to be in. And of course, that's dictated by how much income you have. And of course, if you're under the age of 59 and a half, tack on an additional 10% for withdrawing early.

Got to sort through those tax implications of your retirement accounts, both I guess as you're filing this year, but also looking ahead and thinking about how you're going to be taking that money in retirement. All right, Social Security. I thought, Jon, that that didn't get taxed.

Is that not the case? So it depends on what other income you have. So if your only income is Social Security in retirement, well, pretty easy.

It's not going to be taxed. If you had your Social Security plus another $10,000 of income. Also, you're still probably under the threshold where it's not going to be taxed. If you have Social Security plus you take $20,000 out of an IRA and you have a pension that pays you $30,000 a year. Well, now you're going to be in probably the 85% Social Security bracket.

That's at the high end. Now that doesn't mean that 85% of your Social Security gets taken away in taxes. No, it just means that 85% of your Social Security counts as taxable income. So there's this sliding scale and your Social Security will be taxed at a certain percentage based on what other income you've generated. So if this is why if you're in your 30s, 40s, this is why we're so aggressively pushing Roth contributions for people. Because if you take money out of a Roth IRA in retirement, that doesn't count toward that threshold that makes your Social Security taxable.

So if somebody's listening right now is 28 and you can save up all or most of your retirement money in a Roth and then you have Social Security when you retire, you'll probably never pay taxes because all that money coming out of the Roth is tax-free and it's not counting toward your total income that would make your Social Security taxable. So you could live very realistically a tax-free retirement. We do that with some of our clients because we've figured out exactly what the threshold is, how much income they can generate before they pay any taxes. And then we take the income, take the IRA withdrawals right up to that threshold to go along with their Social Security and any other income they want is going to come from Roth or just money they have in cash in the savings account. They'll draw that down, burn through some of that. But we're talking about less than a dozen people that we work with that were able to get into that 0% bracket because most people need more income and all of their savings for the most part are in IRAs.

So we're just not going to get around being taxed on all this stuff. It's interesting here that number 12, it kind of gives you a better sense of just how unlikely it is for people. So it's good to know. But the thing is that's with people where I first met them when they were 61 and that's what we were able to do in the last couple of years of their working life and then get them in that place when it just so happened that their income needs were low enough we can make this work. But if it's somebody who's 10 or 15 years earlier than that and we're able to get them started toward that path can really make a big difference. Yeah, definitely.

All right. So we're talking about the top five tax questions that retirees need to address here in 2023. You look at your different income that you're going to have in retirement as you're kind of breaking it down there. Pension income, does the taxation on your pension income differ from the other forms of income you're going to have? Usually no. You can usually think of a pension as exactly the same as an IRA withdrawal where it's going to count as ordinary income.

There are a couple of weird nuances that I won't even get into because they're so rare. For the most part, yes, you can think of those two things as the same, IRA and pension. You'll get a 1099, more specifically a 1099-R for any pension money you receive.

That's the same form that you get for IRA withdrawals is a 1099-R. It's all retirement income. Now there might be situations where depending on your state, it's taxed a little bit differently. And I guess by the way, Ben, this is something I should mention with your social security question a minute ago. Social security is not taxed the same way in all states. Some states tax it, some do not. So that's something I guess a disclaimer I should put out there if you're listening to this in Idaho, you might have different rules from somebody listening here. Anyway, as far as pensions go, yes, you can assume that that's going to be taxed the same as an IRA.

However, I'll give you one weird nuance. We have this thing called Bailey vesting here in North Carolina. And if you were a fully vested state employee by the year 1989, and usually to be fully vested, you had to be there five years. So that means if you started working for the state before 1984, then you're probably Bailey vested, which means that your state pension and your withdrawals from your state 401k are not subject to North Carolina income tax. Still federally taxed, but not North Carolina income tax.

So it's possible that you could be somebody who's Bailey vested and your pension is actually taxed a little bit less than maybe some other retirement account withdrawal that your spouse has just because you're Bailey vested and they're not. Again, it's a very narrow example, but we do have a handful of people out there that it applies to. Well, you mentioned how things change from state to state. So let me ask you this question for number four is how will taxes change if you decide to move to another state in retirement?

They will go up or they could go down. They might go away altogether, depending on the state, right? So in terms of where we have people moving on a somewhat regular basis we have Tennessee next door is a no income tax state. We have a lot of people in Florida that have retired to Florida, no state income tax in Florida.

So think about this. If you're in the 12% tax bracket in retirement, let's say, so let's say you're a married couple retired with an income of a hundred thousand dollars a year, you're going to be in the 12% tax bracket, federal tax bracket. Well, in North Carolina, you're going to pay just under 6% on that income. Well, in Florida, you'll still have the 12% federal tax, but no state income tax at all.

So that's saving you $6,000 a year. Same if you moved to Tennessee, now their state governments have to get funded somehow, right? So their sales tax is going to be a little higher in those states. Their property taxes might be a little higher, but the actual income tax does not exist there. So that's something to be aware of if you are considering moving to a different state. It's not that you should absolutely move to a state that doesn't have state income tax, but at least be aware of what the situation is. Like don't get your hopes and dreams all set on moving to a particular state and then you find out, oh, their state income tax is significantly higher.

This is going to really change the picture for me. You just need to be aware of what those numbers look like. We haven't had a single person ever retire to New Hampshire, though I do have a client, a couple of clients who own property in New Hampshire, but never had anybody move to New Hampshire and make that their new residence. But New Hampshire doesn't have a state income tax or sales tax. They have a very efficient state government, apparently, that's pretty cheap to run.

So they're able to raise all the revenue they need without state income tax or sales tax, which is pretty unique, but a lot of different nuances, a lot of differences between states is the point of this discussion. So you should know what you're dealing with. All right. One more tax question that you want to address, get down to it, understand before the year closes out, especially if you are in retirement or getting close to retirement. What are the tax considerations for gifting money? Do you want to do so maybe for your children or your grandchildren during your retirement?

I'm not going to be able to give you what I believe to be a satisfactory answer on this because to do so would require several hours of me blathering on and you'd probably just walk out then and the recording would just be running and nobody would ever press the stop button. But at a very high level, I will say this, you need to be thinking about this from two ends, the tax implications for you giving money away, but also the tax implications to them of how that money might behave over the years. So just a couple of examples to show you how things might work. So if you just give cash, you can give up to, I think $16,000 now is the limit. You can give $16,000 to any individual without incurring any gift tax. Now the gift tax is paid strangely by the person who gave the money away, not the person who received it. But Ben, if I wanted to give the money to you, I could actually give you $64,000 without any tax implication.

How can I do that? Well, I could give you $16,000 and Molly could give you $16,000 and then I could give Lauren $16,000 and Molly could give Lauren $16,000. And just like that, we have given you $64,000.

I'm not going to, but hypothetically, I could do that. So with your kids and grandkids, you know, keep that in mind, very few families are going to run into an issue where they have gifted more than what they're able to do that way. Now there might be other things that you do other than gifting cash that might create some issues.

Like here's an example. Now this wasn't an issue from the standpoint that like, it wasn't a surprise for anybody. It was expected, but if you didn't know what you were doing, you could create a mess. So I had a client whose dad gave him some stock.

He said, I've had this for a long time. So there are going to be a lot of gains on this stock if you liquidate it, but it's yours take it and do what you will with it. So he did understanding that he was creating a big tax bill for himself when he sold all that stock, but you know, it was still free money to him.

He just had to be prepared to pay the taxes. So if you're giving away stock like that, both sides of the equation need to understand the tax implications there. Now that's completely different from inheriting stock where you don't have that same issue. So if it's the kind of thing where you're 93 and you think, oh, maybe I'll give some stock to my grandkids here. Well, if you're 93 and have lung cancer, maybe just let them inherit that money instead. It'll be more tax efficient for them. So you just want to be aware anytime you're giving money away, what tax implications might this create for me? What tax implications might this create for them? And that's not to say that just because there are tax implications, you shouldn't do it, but you know, maybe it's worth it for the money you're giving them.

If it's a little bit of a tax issue now, but it puts them in a much better tax position 30 years from now and you're trying to help your kids or grandkids out. Okay. Well, certainly worth considering. So hopefully that kind of answers your question without the two hour soliloquy. It does.

It does. It gives you a lot to think about if you are thinking about giving money and still picture in the 64,000 that you're hitting my way, maybe 2024, 2025. We'll see how that goes. Let's make that part of the 11 year plan.

The hypothetical is in existence and this is recorded for all eternity. So we'll interest you in a dozen eggs instead, roughly the same value. You do have great eggs out there on the farm. No question.

So, and they are pretty valuable at this point. You're right. All right. Let's close out this episode again, if you have questions and look, there's a lot more to go through with taxes and hopefully this gets your mind turning a little bit in terms of why it's important to be thinking about taxes and planning ahead, not just looking back to 2022 to fire taxes in just a couple months, but also why so important to be looking ahead and really position yourself in the most efficient way possible in retirement. Just log on.

Rosewoodwealthmanagement.com is a website, but you can also call or text 800-545-2991. Again, that is 800-545-2991. All right, John, great episode as always. Plenty to think about with taxes.

I know taxes normally is a very, that's a conversation we don't really want to talk about, but so crucial when you look about, look at your financial plan and your overall retirement plan. Kind of important part of being an American. Hope you're enjoying it. Absolutely. Well, we hope you're enjoying Mr. Stillman's Opus. If you are, please hit subscribe on the podcast. You'll find us on every major podcasting app. We'll have a new episode coming in a couple of weeks. John, we'll talk to you soon. See you then. Carolina Weldsteward's doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.