How to Optimize Tax Strategy for Retirement

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It’s never too early to start preparing for retirement, including when it comes to taxes

Whether you’ve just entered the workforce or have recently retired, saving and planning for retirement is an ongoing process. Though 57 percent of Americans say that saving for retirement is their top financial priority, nearly 19 percent of people over age 65 are still working either part- or full-time. Many people start planning too late, or just don’t take the right steps to succeed once the time comes.

While taking any step toward retirement savings is important, one of the most significant components is learning the tax pros and cons for each of your options. Making the right moves can end up saving you a lot of money in the long run.

These suggestions will help you optimize your tax strategy:

Analyze tax brackets and expenses

A first step in optimizing taxes in retirement is understanding what tax bracket you’re in—or which one you plan to be in. Then, take a look at your expenses. What can you cut back on? Try to lower your costs to stay in a lower tax bracket, and you won’t need to withdraw larger sums from retirement savings accounts. Withdrawing less, of course, means that you’ll pay less tax.

Understand Social Security income tax

Social Security income tax is different than regular income tax. If your Social Security income is over $25,000, or $32,000 for married couples, it will be taxed. Up to half of this type of income could be taxed, and up to 85 percent, if your income is $34,000 or above ($44,000 or higher for married couples).

These numbers are calculated based on adding your other retirement income to half of your Social Security income. So, to avoid paying these taxes, make sure you know how to balance all of your retirement income effectively. Working with a tax professional can help you understand the requirements.

Medical expenses

If you have significant medical expenses in retirement, you may qualify for itemized deductions for the unreimbursed eligible medical expenses that are over 10 percent of your adjusted gross income. Eligible expenses could include necessary aids and equipment, visits to your doctor, testing, or Medicare premiums.

Take advantage of charity tax breaks

You’ll be required to pay income taxes on distributions from your traditional IRA. But if you can live without some of that income, you can opt to donate funds directly to a charity. These charitable contributions won’t count toward your income, so you won’t have to pay income taxes on them.

Another route is to donate securities to charity. You can then deduct the amount of the appreciated investment, which is more tax-advantageous than selling the investment and then giving a portion to charity.

Contribute to retirement accounts while in “retirement”

If you’re retirement-age but still working, you are likely still able to contribute to a 401(k) to save for later retirement years. You can make those contributions and defer paying taxes on them now.

Another option is to put money into a Roth IRA. You’ll have to pay taxes on contributions now, but this avoids paying them when you’re withdrawing from the account.

Required minimum distributions

Once you reach 70½, required minimum distributions from applicable retirement accounts begin. Make sure you’re withdrawing the right amount regularly. Otherwise, you’ll have to pay a steep penalty, which is 50 percent of the required withdrawal amount. This is a big mistake with expensive consequences.

Careful, long-term tax planning

It’s essential to not only analyze your current tax bracket but to make projections for the future based on how tax rates will change. Long-term tax planning allows you to manage your sources of income to save the most possible. You will better understand when to withdraw money from which accounts, and how to manage your investments to limit taxes.

Work with a tax professional

When you’re creating a tax strategy for retirement, an experienced professional who knows the rules can help you pay the least amount legally possible.

Provident CPA & Business Advisors offers tax minimization services that can help you devise an effective tax-minimization strategy. We also offer tips on retirement savings and succession planning strategies for your business.

Contact Provident today with questions and to learn more about our services.

How to Identify and Track the Critical Drivers in Your Business

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Critical drivers are your business’s core items that maintain momentum and spur growth

The successful operation of your company depends on a set of critical drivers, those core items that keep a business moving and growing. Taking the time to identify these drivers helps you better manage your teams and your business while helping you evaluate the right metrics.

Start putting more time and energy into the most valuable areas. Also known as value drivers, critical drivers should be clearly identified and tracked to have more visibility into what’s happening.

Identifying critical drivers

Critical drivers are the processes that most impact value and efficiency. These are the behind-the-scenes gears that keep things functioning. So how do you identify these items?

There are generally three types that are directly related to value. Growth drivers are processes within the sales, marketing, and business development areas; efficiency drivers are those within operations, and financial drivers are finance processes.

To be considered a critical driver, these processes must be measurable and illustrate performance and progress. They also must be controllable. Here are two questions to ask when identifying critical drivers:

  • How much do changes in this process or component impact the business?
  • What factors can be controlled by management versus by the market?

Think of all the components of your business like a flow diagram, in which one concept breaks into two others, and so on. Thus, if priorities within your business are working toward growth and profit, start there. Then, outline each component that drives profit. Within those components, like sales, break it down further.

Once you identify the components of your business, you can define the critical drivers within those categories. What processes are most closely tied to your company’s core values and vision? Which processes have the most impact on profit and company value?

All organizations will be different, so there’s no one formula. To start, try to nail down three primary activities that drive your business.

Tracking critical drivers

Tracking key performance indicators (KPIs) is just as crucial across departments and processes. But these metrics are especially important for critical drivers and will help you isolate your main value drivers.

There may be many components that comprise a key process for your business. And while all relevant performance metrics should be tracked and monitored, set up additional measures for the most valuable drivers. Focus on ways to improve these metrics, and improvements to revenue, sales, or profit will follow.

For example, factors driving your sales numbers include KPIs like the number of new customers, the number of leads, the number of conversions, and the number of customers retained. These metrics are tracked over a given period so that changes, like new marketing strategies, can be evaluated. For example, focus on sales KPIs that have the most significant impact on moving sales numbers.

Set clear objectives and benchmarks for each critical driver you define. If you’re not hitting the goals, focus your energy on improving that element. It may take trial and error to see the results you want, but it’s a huge step to simply know where you should be focusing.

Give your time and money more value by prioritizing the core processes that have the biggest impacts on success.

A business advisor can help

One of the easiest ways to identify and track your critical drivers is to work with a professional advisor. These concepts can be challenging to grasp, especially for new or smaller businesses. An advisor can help you isolate value drivers and assist in putting methods in place to track and analyze the performance metrics.

The team at Provident CPA & Business Advisors can assist you in reviewing practices and performance numbers. We utilize the Entrepreneurial Operating System (EOS), which involves nailing down the six essential components of your business: Vision, People, Data, Issues, Processes, and Traction. We’ll make sure you’re tracking KPIs and focusing on critical drivers that can lead to long-term growth and success.

Get in touch with Provident today to learn more about our services.