A crucial component of a comfortable retirement is having a plan for tax-efficient distributions. If there’s one thing every retiree or nearly retired person knows, it’s this:

The tax man is coming.

Throughout our earning years, many of us are funding tax-deferred retirement accounts with pre-tax dollars and that equates to some hefty tax bills in retirement.

The government cleverly uses the word "Deferred" or "Defer" here, and this single word is the beginning of the problem.

The perception of defer (incorrectly) is that we are opting out or choosing not to do something, (Defer the kickoff, defer to someone else, etc).

When in reality we are actually just POSTPONING the tax.

Here's a real world example to make this more "Real". Think of this as if we are talking face to face.

Let’s say you wanted to borrow $10,000. You would ask two questions before you took the money.

The first question would be "How much interest do you have to pay?"

The second question would be “When do you have to pay it back?”

If the lender responded by saying, “We have enough money right now and do not need any payments

from you at this time—but there will come a time when we will need the money. When we know how

much we need—we will be able to determine how much interest we have to charge to get the amount we need.”

Would you cash that check? Absolutely not!

But this is exactly what we are doing with the government in “Qualified Accounts.”

How you access funds from these retirement accounts greatly influences your tax liabilities and, consequently, your overall financial stability. 

Here we're covering one highly useful, but minimally used and mostly unknown strategy for tax-efficient distributions so you can maximize your retirement income and pay less tax to Uncle Sam.

Understanding the Basics of Retirement Income

Your qualified plans like 401ks and IRAs are great savings vehicles, but terrible distribution vehicles, because the taxes are all due when you are on a fixed income. 

Required minimum distributions (RMDs) begin at age 73, meaning you can avoid the tax burden if you do not withdraw until then. Creating a plan to help offset those taxes is paramount.

Balancing your retirement savings between tax-deferred accounts and accounts that have tax-free withdrawals is step number one.

Step number two is determining which tax-free strategy is right for you. The one we use most often is called the Volatility Buffer Strategy (VBS).

This strategy is designed specifically for tax-efficient distributions. It’s most commonly used by people in higher income brackets looking to optimize their retirement income through tax-free investments. 

This approach could be considered a Roth conversion alternative and focuses on creating tax-efficient income without triggering out-of-pocket tax events associated with Roth conversions.

By leveraging tools such as certain types of life insurance contracts that offer tax-free growth and tax-free distributions, the VBS strategy allows retirees to supplement their income without facing the heavy tax liabilities associated with traditional retirement account distributions. 

The core goal of this strategy is to create a consistent, tax-free income stream during retirement, ensuring that you can enjoy financial stability without the burden of ongoing tax obligations.

Specifically, determining the optimal approach for tax-efficient distributions varies based on individual circumstances. VBS solutions are not a cookie-cutter process and we work closely with clients’ entire financial teams to provide personalized guidance tailored to your specific situation. 

Conclusion

Implementing a plan for tax-efficient distributions in retirement is essential for maximizing your income and minimizing tax liabilities. If you’d like to see how the VBS solution works book a Discovery Call below.