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The Overlooked Factor in Retirement Planning: Taxes and Healthcare Costs

Patrick Clark
meeting with a planner

When people think about retirement planning, their minds often jump to investments—stocks, bonds, and real estate. While these are crucial, they’re only part of the picture. One major factor that tends to be overlooked is taxes. Proper tax planning can have a significant impact on your retirement, helping you protect your wealth and minimize unexpected costs like increased healthcare premiums.



In states like Massachusetts and New Hampshire, where tax laws can vary, understanding how taxes and healthcare costs interact is essential to crafting a strong retirement plan. While investments are important, taxes—and their impact on your overall financial picture—can quietly erode your income if not properly planned for.



The Importance of Tax Planning in Retirement



Many people underestimate how much taxes can influence their retirement income. It’s not just about how much money you have saved or invested, but how much you can keep after taxes. Without the right strategy, you may be caught off guard when you start withdrawing from your retirement accounts.



In Massachusetts, for example, certain retirement account distributions may be subject to state income taxes. Even in New Hampshire, where there’s no state income tax on wages.



Managing Required Minimum Distributions (RMDs)



Once you reach age 73, or age 70 ½ if born before July 1, 1949, you must start taking required minimum distributions (RMDs) from your tax-deferred retirement accounts such as 401(k)s or traditional IRAs. These distributions are taxed as ordinary income, which may increase your total tax liability and possibly push you into a higher tax bracket.



This is where strategic planning becomes key. By managing how and when you take your RMDs, you can help reduce the tax burden. In states like Massachusetts, these withdrawals could increase not only your federal taxes but your state taxes as well. In New Hampshire, while RMDs aren’t taxed directly, they could contribute to higher dividend and interest income, which is taxed by the state.



Social Security and Taxation



Many people are surprised to learn that Social Security benefits can be taxed, too. Depending on your overall income, up to 85% of your Social Security benefits could be subject to federal income tax. Your total taxable income—pensions, RMDs, and investment income—determines how much of your Social Security is taxable.



In New Hampshire and Massachusetts, Social Security benefits are exempt from state taxes, but federally, you’ll still need to plan for this added tax burden. Proper planning can help reduce the percentage of your Social Security that is taxed, keeping more of your retirement income intact.



Tax Planning to Minimize Medicare Premiums and IRMAA



In addition to taxes on your retirement income, Medicare premiums can also increase based on how much income you report. This is due to the Income-Related Monthly Adjustment Amount (IRMAA), which applies to Medicare Part B and Part D premiums. If your income exceeds certain thresholds, you could face higher premiums.



IRMAA is calculated based on your modified adjusted gross income (MAGI), which includes RMDs, taxable investment income, and other retirement income. Higher MAGI could trigger IRMAA surcharges, increasing your healthcare costs.



Since IRMAA is determined by your income from two years prior, it's critical to plan ahead to avoid crossing into higher income thresholds. Tax strategies, such as Roth IRA conversions or qualified charitable distributions (QCDs), may help reduce your taxable income and lower your exposure to IRMAA.



1. Roth Conversions 


   By converting funds from tax-deferred accounts to a Roth IRA, you pay taxes upfront, but future withdrawals are tax-free. These Roth withdrawals do not count toward your MAGI, which can help keep your Medicare premiums lower in the long run. However, the timing of Roth conversions is key—you don’t want to convert too much at once and bump yourself into a higher tax bracket in the short term.



2. Qualified Charitable Distributions (QCDs) 


   If you’re charitably inclined, you can make donations directly from your IRA, which will count toward your RMDs but not increase your taxable income. This can reduce your MAGI and help keep your Medicare premiums under control.



3. Strategic Withdrawals 


   Balancing withdrawals between taxable and non-taxable accounts (such as Roth IRAs) may help you better manage your income and control both taxes and Medicare costs. Taking this long-term approach to withdrawal sequencing can help prevent unnecessary increases in both taxes and IRMAA surcharges.



The Role of a Financial Advisor



While navigating these tax strategies may seem complex, working with a financial advisor can seek to provide a clearer path. A good financial advisor may help you create a retirement plan that not only focuses on growing your wealth but also seeks to minimize the impact of taxes and healthcare costs on your overall financial picture.



Advisors who understand local tax laws in states like Massachusetts and New Hampshire can help you explore options like Roth conversions, tax-loss harvesting, or charitable giving strategies. They seek to help you reduce taxes on your income, manage healthcare costs, and ensure that you’re making the most of your retirement savings.



The Bottom Line: Taxes and Healthcare Costs Matter



While investments are certainly a critical part of retirement planning, they’re not the full story. Taxes and healthcare costs, especially Medicare premiums and IRMAA, can take a significant bite out of your retirement income if not properly managed. By being proactive about tax planning and understanding how these factors interact, you may keep more of your money and enjoy a more secure retirement.



For retirees in Massachusetts and New Hampshire, understanding the nuances of tax laws and healthcare costs can help protect your financial future. If you’re unsure where to begin, working with a financial advisor may be a helpful step in crafting a tax-efficient retirement plan that aligns with your goals.


Disclosures: Past performance is not indicative of future results. This material is for informational use only and should not be considered investment advice. Investing involves risk. Principal loss is possible. The opinions expressed are those of Guardian Wealth Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Investment advisory services offered though Guardian Wealth Advisors, LLC D/B/A Finance Roadmap Planning. Guardian Wealth Advisors, LLC (“GWA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA’s investment advisory services can be found in its Form ADV Part 2 or Form CRS, which is available upon request GWA-24-79

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Past performance is not indicative of future results. This material is for informational use only and should not be considered investment advice. Investing involves risk. Principal loss is possible.

 The opinions expressed are those of Guardian Wealth Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.

 Investment advisory services offered though Guardian Wealth Advisors, LLC D/B/A Finance Roadmap Planning. Guardian Wealth Advisors, LLC (“GWA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA’s investment advisory services can be found in its Form ADV Part 2 or Form CRS, which is available upon request.

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