Retirement Planning: Using Non-Taxed Assets to Keep the Taxman at Bay

HCR Wealth Advisors
7 min readApr 29, 2020

You want to stretch your retirement nest egg as far as possible and to do that, you need to think of the taxman during the accumulation phase.

How taxes play a role in retirement spending

One thing is clear: the more taxes you have to pay in retirement, the more assets you have to accumulate before you retire. One of the values of working with groups such as HCR Wealth Advisors is to access their insight as you build multiple streams of income for retirement. Another goal is to know which accounts to tap and in what order. HCR Wealth Advisors’ goal is to provide a withdrawal strategy that holds taxes to a minimum and avoids any penalties.

Your nest egg might include some mix of 401(k)s from work, a pension, your own traditional or Roth IRAs, an investment portfolio, real estate investment income, Social Security, annuities, and other assets. As you tap into those assets for liquidity in retirement, these three areas might be affected:

Your tax bracket. This first one is straightforward: if you increase the amount of income you have to declare, it can bump you up from one tax bracket to the next.

Social Security taxation. Increasing your income can also increase how much of your Social Security benefits are taxed. The calculation hinges on a formula called your ‘combined income,’ which includes your Adjusted Gross Income (AGI), your nontaxable interest, and half of your annual Social Security benefits.

Depending on the result, you could face taxes on 0%, 50%, or up to 85% of your benefits. Applying the formula is somewhat complicated, but it is worth tweaking the taxable income you access each year to minimize how much of your Social Security benefits are taxed. HCR Wealth Advisors would factor this into your plan.

Medicare premiums. Your income influences your Medicare Part B premiums. In 2020, the standard monthly premium for an individual is $144.60 up to an annual income of $87,000. Taxable income above that triggers a high-income surcharge. Your premium increases in steps up to $491.60 per month at an income of $500,000 or more.

For a married couple filing jointly, the cap for the $144.60 per-person premium is a combined annual income of $174,000 or less, rising to $491.60 each above $750,000 of yearly income.

What is the most common tax disruptor?

Regardless of how much money you need to cover your expenses in retirement, once you reach age 72, you have to start withdrawing funds from your tax-advantaged accounts. (The starting age was 70½ before the recently passed SECURE Act.) Applicable accounts include traditional IRAs, SEPs, SIMPLEs, 401(k)s, 403(b)s, 457(b)s, profit-sharing plans, and other defined-contribution plans.

Since you funded those accounts with pre-tax dollars (meaning you didn’t pay taxes on the money when you earned it), the IRS is anxious to get you to release funds from their protected status. So, each year, you are required to take a Required Minimum Distribution, or RMD, which the IRS then taxes as ordinary income.

The value of your RMD each year is determined by an IRS formula found in its life expectancy tables. The applicable table gives you a percentage that you apply to the balance in your tax-advantaged accounts on December 31 of the prior year.

Miss an RMD, and you will pay a stiff penalty: 50%. So, if you failed to withdraw an RMD of $10,000, you would pay the tax on the $10,000, plus pay a penalty of $5,000. The personalized professional services provided by HCR Wealth Advisors will ensure that this doesn’t happen.

(Note that the pandemic-related CARES Act has suspended RMDs for 2020 but you will have to know about them once things settle down. The IRS will want its tax revenue. It always does.)

So how can a financial advisor’s strategy help lower taxes?

Working with a financial advisory firm like HCR Wealth Advisor on a withdrawal strategy for retirement cannot change the fact that you need to take RMDs, and that Social Security benefits and Medicare premiums are affected by your income. But, HCR can help you move your assets at the most advantageous time into categories of assets that will not be taxed when used. Here are some examples.


Roth IRAs are not subject to RMDs since you contributed to them with after-tax dollars. (You didn’t take a tax deduction for the contribution.) There are no deferred taxes to pay. So, they offer flexibility when you need to tap your retirement savings, but are managing your income levels to keep taxes at a minimum.

When you roll money from a traditional IRA to a Roth, you have to pay the tax on the funds you convert. You want the lowest possible tax rate, so timing the conversion is vital. With the help of HCR Wealth Advisors’ modeling, you may find the ideal time to be after you retire, but before you start taking Social Security or having to take RMDs.

A Roth conversion lowers the balance in your traditional accounts (which you will use to calculate your RMDs). Also, after age 59½, as long as you’ve held the account for at least five years, you can tap the account tax-free and penalty-free whenever you want after that.

Municipal bonds and funds

Municipal bonds, or ‘munis,’ are debt obligations that cities, counties, and states issue. They are a source of tax-free income that could offer you some flexibility as you manage your taxable income in retirement.

However, you may want the input of an experienced team like HCR Wealth Advisors to confirm that municipal bonds and funds meet your investment needs. While income distributions are not subject to federal income taxes, the interest rate paid may be lower than with taxable bonds (though they may be taxed at the state level.)

Also, munis carry some potential for default. When the City of Detroit, MI, filed for Chapter 9 bankruptcy in 2013, it reminded investors everywhere of their vulnerability as the courts gave priority to pensions over bondholders.

HCR Wealth Advisors would point out another downside to munis: municipal bond income — although tax-free — is factored into the equation for calculating taxation of Social Security benefits.

Cash-value life insurance policies

If you have maxed out your contributions to IRAs or earn too much to be able to contribute to Roth IRAs, another asset might make sense. IRS-sanctioned cash-value life insurance policies allow for tax-free growth on investments, as well as tax-free withdrawals. These are particularly interesting if you’re playing catch-up as you approach retirement since they don’t have the caps the other instruments do.

Like Roths, such policies are purchased with after-tax funds but, there are ways of turning your cash value into a guaranteed tax-free income stream for life. Your investment choices vary from conservative fixed-rate to fully invested policies. And you will technically be taking a loan against the death benefit from the insurance company, at some cost.

This asset class can be complicated. You will want to work with a team of experienced fiduciaries such as HCR Wealth Advisors as you determine the advisability and ideal structure of such a solution.

HSA accounts

A Health Savings Account (HSA) acts like a personal savings account. You must be enrolled in a High-Deductible Health Plan (HDHP) to open one. Your contribution is tax-deductible, up to $3,550 for an individual and $7,100 for family coverage, with a 55-or-over catch-up amount of $1,000.

Investment options may be limited, but your earnings grow tax-free. These plans intend to cover current medical expenses, but you can carry unused funds forward from year to year. You can contribute while in the HDHP. If you leave it, the funds continue to grow and remain available through a convenient debit card.

When you retire, you can withdraw funds tax-free if you use them for qualified medical reasons such as Medicare premiums, prescription medications, and co-pays. If used for other purposes, you will have to declare them as income, pay the tax, plus an additional 20% tax penalty. Beyond age 65, there is no 20% penalty for non-medical use, but you will pay the tax as income.

Giving RMDs to charity

This tactic provides some flexibility. Consider giving your RMD to charity if you have to take an RMD and don’t need the income. You can avoid having it push you into a higher tax bracket, make your Social Security taxable, or increase your Medicare premiums.

Anyone over age 70½ can give up to $100,000 each year to a qualified charity directly from their traditional IRA account without triggering a taxable event. The transaction is called a Qualified Charitable Distribution, or QCD. The gift counts as the RMD, and can exceed the RMD, but is not included in your Adjusted Gross Income.

As HCR Wealth Advisors would explain, this strategy has another advantage. The direct transfer from your IRA to the charity also lets you keep that RMD out of the income calculation used by Social Security to decide what portion, if any, of your Social Security will be taxable.

Developing your tax-wise retirement plan

These are just some of the possible tools to manage your taxable income in retirement. As you develop your retirement plan, you will want to be proactive and creative as you explore the best way to reach your financial goals. The more options you have of how your retirement income gets taxed — in the spending phase — the more manageable the task will be.

About HCR:

HCR Wealth Advisors is a team of established, collaborative financial veterans who report to only one person: you. With decades of cumulative experience, everyone at HCR Wealth Advisors is guided by a commitment to protect your self-interest, grow your wealth, and help achieve financial peace of mind. HCR Wealth Advisors was founded in 1988 and is located in Los Angeles, California.

This article is provided for informational purposes only and should not be interpreted as investment advice.

Originally published at on April 29, 2020.



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