How to Save Taxes on Retirement Income

We all hate taxes. We’re all patriots. Somehow those two things exist at the same time.

Before we go any further, let me be clear. I’m not a tax advisor. If you need tax advice, go to a CPA or a tax attorney. They took the test. They have the checkbox. Listen to them.

Now let’s talk about this from a layman’s standpoint.

The Roth Fantasy

Some people say, “That’s easy, Stan. I’ll just use a Roth IRA. Tax-free income.”

Okay.

You already paid a choke-a-horse amount of taxes upfront to make that Roth.

And secondly, you’re trusting that the rules will never change. I hope they don’t. But remember, politicians once said Social Security would never be taxed.

Rules change.

If you want to do Roth conversions, maybe don’t do the whole ball of wax. Run the math. Think it through.

Municipal Bonds and Other “Tax-Free” Ideas

Back when I was at Morgan Stanley, we could get AAA municipal bonds that generated tax-free income.

Inventory is different now from what I hear.

But again, nothing is magic.

Let’s stop trying to not pay taxes.

Let’s try to not pay as much in taxes.

That’s reality.

Lowering Your Tax Bracket

What’s the hope?

The hope is that when you enter Chapter Two — and Chapter Two is about you — your income tax bracket drops because you’re no longer earning wages.

That’s usually what “saving taxes” means.

Not zero.

Lower.

Build the Income Floor First

Instead of obsessing about taxes, focus on income.

What’s your income floor?

• Social Security — the best inflation annuity on the planet
• Required Minimum Distributions — yes, that’s annuity-type income
• Pension income — that’s an annuity
• Other income sources

All of that is taxable under current rules.

Period.

Annuities and Income Creation

Annuities create income two ways.

1. Lifetime income:
   • Single Premium Immediate Annuities
   • Deferred Income Annuities
   • Qualified Longevity Annuity Contracts
   • Income Riders
2. Or you can use a MYGA and peel off the interest.

That’s income hitting your bank account.

You should never buy an annuity for market growth.

They are transfer-of-risk contracts. Non-correlated. Not attached to the market.

Work Both Sides

Retirement planning is a two-headed monster.

• The annuity side
• The market side

On the market side, ask about treasuries, munis, preferred stocks, dividend stocks, bond funds.

If someone can’t explain it to a nine-year-old, don’t buy it.

Finance isn’t complicated. The people in it make it complicated.

The Bottom Line

Saving taxes on retirement income doesn’t mean eliminating taxes.

It usually means:

Lower income.
Lower bracket.
Lower exposure.

Build the income floor first.

Then understand the tax impact.

That’s the real order of operations.