Creating a comprehensive estate plan requires you to do much more than simply decide who will receive your estate assets when you are gone because a comprehensive estate plan can accomplish much more than that. For example, a well thought out estate plan should also help your assets grow while you are alive, protect you in the event of your own incapacity, and continue to provide for loved ones once you are gone. Another component of a comprehensive estate plan is retirement planning. In order to ensure that you still have assets left to pass down to loved ones you must plan carefully for your own retirement. Within your retirement component, you will need to include retirement tax planning as well to ensure that you plan for the impact taxes will have on your retirement income and the transfer of wealth that will occur during and/or after your retirement years.
Why Is Retirement Tax Planning So Important?
Throughout your working years you have undoubtedly been aware of the impact taxes have on your life. For example, you can probably remember, with a high degree of accuracy, how much you paid in income taxes on your most recent tax return. Unfortunately, taxes do not stop impacting your life when you retire. On the contrary, taxes frequently have a much greater impact during our retirement years than they did during our working years. In order to ensure that taxes do not unduly deplete your estate, therefore, you need to include retirement tax planning in your estate plan.
What Type of Taxes Might Impact Me during My Retirement Years?
As mentioned, taxes can have an even greater impact during your retirement years than they did when you were working. One reason for this is that you may incur a wider variety of taxes during your retirement years because your financial portfolio may change. For instance, some of the taxes you may need to plan for include:
- Income tax – although you will be retired, you will likely still earn some type of income. Because you will probably be on a fixed income, you need to plan for the tax you may owe to ensure that you don’t find yourself scrambling to pay it.
- Capital gains tax – like many retirees, you may decide to sell your home and “downsize” or you may prefer to gift the home to a child.
- Withdrawals from retirement accounts – like many people, you likely have at least one retirement account that you plan to depend on for supplemental income during your retirement years. The type of account will determine if you already paid taxes on the funds or not. If it is a tax-deferred account, you will incur a tax when you withdraw the funds held in the account.
Gift and Estates Taxes
The other type of tax that will potentially impact your estate is state and/or federal gift and estate taxes. This is effectively a tax on the transfer of wealth. At the federal level, the lifetime exemption allows each taxpayer to exempt the current exemption amount before the tax is imposed on an estate at the rate of 40 percent. The lifetime exemption amount was permanently set at $5 million back in 2012 but is adjusted annually for inflation. For 2016, the exemption amount is $5.45 million, meaning your estate will only incur the tax if the combined value of all lifetime gifts and estate assets exceeds $5.45 million. The State of New York also imposes an estate tax for estates that exceed the state exemption amount which is set at $4,187,500.00 for deaths that occurred on or after April 1, 2016, and on or before March 31, 2017.
As you can see, taxes could have a dramatic impact on your retirement years as well as on the estate that you pass down to loved ones. As such, it only makes sense to include a retirement tax planning component to the retirement planning section of your comprehensive estate plan.
For more information, please download our FREE estate planning worksheet. If you have questions or concerns relating to retirement tax planning, contact the experienced estate planning attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.