People in retirement often wonder what to do when you need money to live on, or to make a major purchase or go on vacation; or before retirement, for buying a house or to pay for college, or whatever.
Some people say that you should look at taking money out of a tax deferred vehicle for things like this while others say you should take tax deferred money out last. We’ve heard advisors say things like “you’ll be in a lower tax bracket in retirement, so you should keep socking away money into tax deferred accounts. Others say the exact opposite, and you shouldn’t put money into tax deferred accounts.
The right answer? FIGURE IT OUT BY CRUNCHING THE NUMBERS!
We just had a client come in to see us who moved here from out of state, and had been told to accumulate money in certain accounts because she would be in a “lower bracket” in retirement. Well, because she hadn’t done the math, she found out that by doing what she did, she pushed herself into a HIGHER bracket in retirement, and cost herself a bundle in needless taxes!
Another client was told NOT to accumulate money in tax deferred accounts because he’d end up paying the same or more in taxes when he took the money out. When he came in to see us, we had the unpleasant task of telling him he had overpaid his taxes for years and years based on his advisor’s advice given without the benefit of CRUNCHING THE NUMBERS!
So, the tip for this month is to never go by rules of thumb or people’s guesses when it comes to making big decisions with your money! You have to plan in a careful and thoughtful manner, and be sure to CRUNCH THE NUMBERS!
As always, these tips are general in nature, and are intended to give you some ideas and guidelines as to things you should be aware of. Please don’t take any actions without consulting us, or other appropriate professionals!