65-year-old Utah couple find $292,567 in retirement tax savings

At 65 years old, Mike and Patty from Lehi were reaching retirement age and were in a good position.

Mike had worked for 20-plus years for a local Salt Lake City company. Patty was a stay-at-home mom and later became a substitute teacher.

They owned their home. They didn’t have any debt to speak of. Their kids were launched and were happy, healthy, and independent.

They had a generous fund of rainy day savings, and had put away roughly $500,000 in tax-deferred IRAs.

They wanted to keep their retirement accounts growing – while paying as little in taxes as possible. So Mike and Patty planned to use some of their savings plus their income from Social Security to cover their retirement expenses for the next few years. When they turned 73 years old, they planned to start taking Required Minimum Distributions from their IRAs.

In short, they had done everything right. Or had they?

Mike and Patty’s story isn’t unique. Like many other hard-working Americans, they used tax-deferred IRAs and 401Ks to avoid paying taxes while saving for retirement. This is widely-recommended by CPAs and tax accountants. In part, because it lets you reduce your taxes owed each year, while they’re helping you file your taxes.

But Mike and Patty were quite shocked when they realized what they had done by following this so-called “best practice” of delaying their taxes.

They had placed what some financial planners call a tax time bomb right in the middle of their retirement. And their current plan was only set to make it worse – but they didn’t know that, yet.

Mike and Patty had seen B.O.S.S. Retirement Solutions on KSL TV. They’d also heard the show on the radio. And even though they were pretty confident in their plan for retirement, they decided to reach out.

They figured it wouldn’t hurt to get a second opinion on their plan

Especially because B.O.S.S. offers a free, custom Retirement Tax-Savings Analysis.

A fiduciary advisor from the B.O.S.S. Retirement Solutions team took Mike and Patty through their standard process. This process is designed to show you how much money you would be paying in taxes when you’re retired – as well as any opportunities to reduce these taxes.

Mike and Patty shared some basic information about what money they had, in which accounts, as well as their retirement plans. They also explained how they planned to use that money in retirement.

The advisor calculated an estimate of how much Mike and Patty would owe in taxes on their retirement savings – including that $500,000 in their tax-deferred IRAs.

Mike and Patty were stunned at the tax projection

Unfortunately, a lot of people underestimate what they’ll owe in taxes on their IRAs and 401Ks in retirement.

It’s easy to look at a $500,000 account, assume a 25% tax rate, and calculate that you’ll pay $125,000 in taxes. But it really doesn’t work this way.

Because you don’t just pay taxes based on today’s value, you only pay taxes on the money you withdraw from your IRA or 401K.

If your account value grows – as you hope it would – your future tax obligations grow, too.

Mike and Patty didn’t plan to start taking the money out of their tax-deferred plans until age 73. Assuming a conservative 5% growth rate, that money would be worth nearly $750,000 before they withdrew the first dime.

This sounds great until you realize Mike and Patty would also owe taxes on the extra $250,000. Plus, they only planned to withdraw a portion each year, so the account would continue to grow – along with the amount of taxes they would owe.

All in, Mike and Patty were on course to pay an estimated $187,428 in taxes just on the Required Minimum Distributions from their IRA – up through age 90.

If they reinvested those withdrawals, they could expect to pay another $62,958 in taxes on that money.

And to top it all off, their children could be hit with a massive $167,181 tax bill on what would be left in the account after Mike and Patty were gone.

This is why it can be so helpful to get professional help in estimating retirement taxes

Based on this calculation, Mike and Patty could pay as much as $417,567 in total taxes on the money in their tax-deferred IRA – not $125,000 as you might expect.

That was the bad news.

The good news came through their Retirement Tax-Savings Analysis, from B.O.S.S. Retirement Solutions.

Thanks to the fiduciary advisor they worked with, Mike and Patty learned they had a huge tax-saving opportunity in their tax-deferred IRAs. They could convert the $500,000 in traditional IRAs to tax-free Roth accounts. And this would bring their taxes on that money more in line with expectations.

This would require a one-time tax payment, estimated at $125,000 – which could be paid from the current account balance, or other sources of their choosing.

But after that, the money would grow tax-free, for as long as they had money in the account.

They wouldn’t owe any more taxes when they withdrew money from this Roth account. And they wouldn’t owe any more taxes on the future growth of their investments. The Roth account would remain tax-free, even if their investments quadrupled in value.

Plus they wouldn’t have to worry about required distributions, because RMDs don’t apply to Roth accounts. And a Roth account also allows Mike and Patty to pass on whatever is left in the account tax-free when they pass away.

So here’s the simple math:

Mike and Patty took advantage of a simple tax planning strategy and reduced the tax obligation on their IRAs from $417,567 to just $125,000. This single move saved them $292,567 in taxes. Now, this money is theirs to spend on themselves and their family.

This is just one example of the many tax savings strategies available to all Utah families.

If you’ve saved at least $200,000 for retirement – especially in an IRA or 401K – it’s worth getting an estimate of how much you’ll owe in taxes on that money in retirement.

Like Mike and Patty, you may be shocked how much money could go to Uncle Sam. But you may be even more surprised by how much money you could save.

It’s not unusual for families to save tens of thousands – if not hundreds of thousands – of dollars in taxes when they retire.

It’s important to execute this tax-saving strategy correctly. Professional help is advised to avoid any unwanted penalties or taxes. That said, this is a very common strategy that’s widely available to all Utah families.

To discover which strategies could save you the most money in taxes, simply request a free, customized Retirement Tax-Savings Analysis from B.O.S.S. Retirement Solutions.

During this quick appointment, a fiduciary advisor will gather some basic information from you. Next, they’ll determine the tax-planning strategies that are best-suited for your specific situation. Then, they’ll sit down and share these strategies with you, so you can see exactly how much money you could save.

This offering is especially beneficial for families who have saved more than $200,000 up to a few million dollars for retirement.

To schedule your free, no-obligation B.O.S.S. Retirement Tax-Savings Analysis, request it here: Retirement Tax-Savings Analysis online here.

All advisors at B.O.S.S. Retirement Solutions are held to a fiduciary standard. This means each advisor is legally required to put your financial needs before their own.

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To read this article on KSL.com, click here.

Tyson Thacker and Ryan Thacker are the CEO and President of B.O.S.S. Retirement Solutions. They are a five-time winner of Utah’s Best of State Award and have seven offices located throughout the Wasatch Front.

This is for illustrative purposes only, results may vary. Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and no statement contained herein shall constitute tax, legal or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. BOSS submitted applications and paid application fees to be considered for the Utah Best of State for Retirement Planning awards. The award results were independently determined by the awarding organization’s criteria (https://www.bestofstate.org/about.html) and the information BOSS provided in the applications. BOSS received the Utah Best of State award in 2019, 2020, 2021, 2022, and 2023. Our firm is not affiliated with the U.S. government or any governmental agency. Marketing materials provided by Infinity Marketing Services