Retirement Income Tax Planning

Retirement Income Tax Planning

by Kristin P. Sinclair – A Accu Tax – February 19, 2020

Recently Carol has had to make several expensive trips to the car repair shop, and she has decided now is the time to trade up.  Carol researched 2020 models earlier this month and found a new small truck that fits her lifestyle.  Carol feels this truck will provide her reliable transportation and has a warranty that will provide her peace of mind.

Carol has not had a car payment for five years.  She has been saving for her down payment, and would like to pay off her new truck in three years or less.  Carol does not have a home mortgage payment, and has two credit cards that she pays off every month.  She feels confident that she will qualify for a low interest rate truck loan.  Obviously, Carol has been considering many factors in this truck purchase decision.  

Carol enjoys her part time job, the people she works with and meets at work.  She also likes the extra spending money.   She doesn’t want the new truck payment to crimp her lifestyle.  Carol has 10% federal and 7% state taxes withheld from her monthly pension.  Plus 10% federal taxes withheld from her Social Security income, and 5% of her part-time job income withheld for state taxes.

Carol plans to discuss with her tax preparer Kristin Sinclair her 2019 tax preparation, and the tax impact of withdrawing extra funds from her Traditional IRA to help with her truck down payment.

Carols’ home state does not tax her on her Social Security income, even when the federal government taxes her based upon her provisional income. Carol’s home state provides an additional tax break since she is over 65 years of age.  She also qualifies for an additional tax break on her long-term capital gains from her investment capital gain income.

Carol has some friends advising her to pay her new truck outright and skip the loan payment.  Before making a final decision to take an additional $15,000 out of her Traditional IRA Carol waits to discuss this with Kristin Sinclair her tax preparer.  

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Carol tells Kristin that with an additional $15,000 Carol can keep her payment low and pay off the truck loan in less than three years.  Unfortunately Kristin determines that an additional $15,000 IRA withdrawal most likely would increase Carol’s taxable income.  So much so that significantly more of Carol’s income would now be in a higher tax bracket.  Kristin also determines that there would be more taxes on Carol’s capital gains, and more of her Social Security income would have be federally taxable.  Plus that additional Traditional IRA distribution would also increase Carol’s state taxable income by enough to move her into a higher state income tax bracket.

Kristin advises Carol to take $5,000 from her Traditional IRA this year to add to her down payment.  Then in early January 2021 Carol should  take an additional $5,000 from her Traditional IRA and make a principal only payment on her truck loan.  Finally, in January 2022 to take an additional $5,000 from her Traditional IRA and make another principal only payment.  This should only move a little more of Carol’s Social Security into the taxable column.  Carol will pay a little more in taxes; however, she should still receive tax refunds as she has in the past.  Plus she will be able to pay off her new truck in less than three years !  Smart tax and financial planning for retirement income living !  


Kristin P Sinclair   A Accu Tax   (803)329-0615

February 19, 2020

Written in Charlotte NC and Rock Hill SC