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How can any retiree make a good decision about reducing taxes in retirement, without first mapping out, and projecting a future income stream?

The answer is. . . they can’t. All of us tend to be short-sighted when it comes to making tax-saving decisions. I say short-sighted because we focus on how we can save tax dollars in the current tax year, without giving long-term tax saving moves little thought. For the retiree, a little bit of planning can go a long way in saving future tax dollars.

A comprehensive retirement income plan must consider a lifetime tax reduction strategy that focuses on how today’s decisions to withdraw money from the various types of accounts will impact their tax liability years into the future. The Perennial Income Model™ from Peterson Wealth Advisors projects future income streams for the retiree enabling them to recognize and organize long-term tax-saving opportunities.

Three retirement account tax categories

Before looking at strategies to maximize your lifetime tax savings, you must first understand the categories of retirement accounts and the tax implications of withdrawing income out of each type of account.

Tax-deferred retirement accounts

The money in IRAs/401(k)s and a variety of other company-sponsored retirement saving plans are 100% taxable upon withdrawal unless you use the Qualified Charitable Distributions exception (to be explained). I am likewise going to lump non-IRA annuities into this category. The difference is that only the interest earned on the non-IRA annuity is taxed upon withdrawal, not the entire value of the annuity.

Tax-free retirement accounts

The funds in Roth IRAs and Roth 401(k)s can be withdrawn tax-free.

Non-retirement accounts (after-tax money)

Investments that are individually owned, jointly owned, or trust owned have their dividends and interest taxed annually. They are also subject to capital gains taxation in years when investments are sold at a profit.

Three strategies to reduce your taxes in retirement

At Peterson Wealth Advisors we utilize our Perennial Income Model to provide the organizational structure to recognize opportunities to reduce taxes in retirement. Let’s consider three of these tax-saving strategies:

1. Managing investment income according to tax brackets

Thankfully, your retirement income stream can come from a mix of tax-deferred, tax-free, and non-retirement accounts used in combination to lower your tax liability.

The key is to determine which of the above categories of accounts should be tapped for future income needs, and when. Tax-efficient income streams that are thoughtfully mapped out at the beginning of a retirement be extremely effective to help minimize your lifetime tax burden.  With advanced planning, you can avoid the costly mistakes of conventional wisdom, such as: withdrawing from after-tax and Roth IRAs early in retirement and waiting to tap into taxable IRAs until the Required Minimum Distribution rules mandate withdrawals at age 73. This mistake results in the retiree paying minimal taxes from retirement date to age 73, then paying high taxes and higher Medicare premiums from age 73 until death. The Perennial Income Model shows us that withdrawing some taxable money from IRAs early in retirement levels out the retiree’s tax burden and keeps the retiree from being forced into higher tax brackets once the RMD rules kick in. When you thoughtfully structure your retirement income streams from a variety of tax locations within your portfolios, you can experience a higher standard of living while still paying very low tax rates.

2. Qualified Charitable Distributions

The most overlooked, least understood, and one of the most profitable tax benefits recognized by forecasting income streams through the Perennial Income Model comes as future Qualified Charitable Distributions are planned. Qualified Charitable Distribution, or a QCD, is a provision of the tax code that allows a withdrawal from an IRA to be tax-free if that withdrawal is paid directly to a qualified charity. Charitable contributions are itemized deductions but because of the high personal exemptions associated with today’s tax code, few itemize. Thus, for those that do not itemize deductions, the only way to get a tax benefit by making a charitable contribution is by doing a QCD. The Perennial Income Model becomes a valuable tool to help the retiree to spread their IRA throughout retirement in coordination of their future charitable giving plans.  By simply altering the way contributions are made to charity, you can make the same charitable contribution amounts and reduce your taxes at the same time.

For more details on Qualified Charitable Distributions for the Latter-day Saint retiree, visit here.

3. Roth IRA Conversions

Converting a tax-deferred IRA into a tax-free Roth IRA can be a valuable tool in the quest to reduce taxes during retirement. Unfortunately, few retirees get it right deciding when to do a Roth conversion, deciding how much of their traditional IRA they should convert, or even deciding if they should convert any of their traditional IRAs at all. As advantageous as Roth IRA conversions can be, they are not free! The price you pay to convert a traditional IRA to a Roth IRA comes in the form of immediate taxation. 100% of the conversion amount is taxable in the year of the conversion. For this reason, investors must carefully weigh whether doing a Roth conversion will improve their bottom line.

Without a projection of future income that the Perennial Income Model provides and the subsequent projection of future tax liability, it is virtually impossible to determine whether a Roth IRA conversion is the right course of action. Perhaps the greatest unanticipated benefit that we have observed since creating the Perennial Income Model is its ability to clearly estimate future cash flows and subsequent future tax obligations for our retired clients. Given this information, the decision of whether to do a Roth conversion becomes apparent.

The Perennial Income Model™ as a tax planner

We first designed the Perennial Income Model to provide the structure to reinforce rational decision-making. It started with a focus on helping retirees match their current investments with their future income needs. Now, we see that the Perennial Income Model’s role is much bigger, including providing the structure to be able to see where future tax-saving opportunities can be realized.

To see how the Perennial Income Model can work with your retirement situation, visit PetersonWealth.com to sign up for a complimentary consultation with a Certified Financial Planner™.

Important news for retirees, we have a Social Security Fairness Act update! Social Security benefits are about to change in a way that will make a significant difference for millions of people.

The Social Security Fairness Act was signed into law on January 5, 2025, this eliminates two controversial provisions that have reduced benefits for millions of public servants for over 40 years. Let’s explore how these changes may impact those affected by these provisions.

We’ll cover the following topics:

Does the SS Fairness Act affect you?
People affected by the SS Fairness Act
What is the SS Fairness Act?
SS Fairness Act repeals
How will the repeals of WEP and GPO impact you?
The sustainability of the Social Security program

Does the Social Security Fairness Act Affect You?

One of the most common questions people are asking is, “Will this change affect me?”

If you’ve always worked in jobs where Social Security taxes were automatically deducted from your paycheck, this new law likely won’t affect you.

However, if you’ve worked in a job that didn’t withhold Social Security taxes and you are eligible for Social Security benefits, then this law could immediately add to your monthly income.

Social Security Fairness Act: People Affected

If You Earned Your Own Social Security Benefit: If you worked long enough in a job where Social Security taxes were withheld to qualify for your own benefit, the Windfall Elimination Provision (WEP) may have reduced that benefit by up to $600. This new law could eliminate that reduction, increasing your benefit amount.
If You Qualify for Spousal or Survivor Benefits: If you’re eligible for Social Security benefits through your spouse’s work history, you may have been affected by the Government Pension Offset (GPO). This new law could also remove those reductions. Here are some situations where this applies:

Spousal Benefits: If your own Social Security benefit is less than half of your spouse’s benefit at their full retirement age, you can claim a spousal benefit instead.

Divorced Spouse Benefits: If you were married for at least 10 years, are now divorced, and your benefit is less than half of your ex-spouse’s benefit, you can claim a divorced spouse benefit.

Survivor Benefits: If your spouse (or ex-spouse, if married at least 10 years) has passed away, you may qualify for a survivor benefit, which could be up to 100% of what your spouse or ex-spouse was entitled to receive.

What Is the Social Security Fairness Act?

The Social Security Fairness Act is a law designed to eliminate the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO)—two rules that have reduced or eliminated Social Security benefits for individuals who also receive a pension from jobs that didn’t pay into Social Security.

These provisions were first enacted to ensure fairness by preventing “double-dipping”, where individuals could receive full Social Security benefits alongside pensions from jobs not covered by Social Security. However, in many instances, these provisions have unfairly penalized public servants such as teachers, police officers, firefighters, and certain government employees once they retire.

By repealing WEP and GPO, the Social Security benefits Fairness Act was created to ensure that these workers receive the full Social Security benefits they’ve earned, providing financial security to retirees impacted by these outdated rules.

Social Security Fairness Act Repeals

Let’s answer the question, “what does the Social Security Act do?” by talking about the repeals.

The Windfall Elimination Provision (WEP)

The Windfall Elimination Provision (also known as WEP), reduces Social Security retirement benefits you receive from your own work if you also have a pension from a job where you didn’t pay Social Security taxes.

In today’s work environment, it is common for individuals to work for many employers throughout their career such as various school districts, police forces, and certain government agencies where Social Security taxes were not deducted from their paychecks. If you worked a non-covered job where Social Security taxes were not taken out of your paycheck and have fewer than 30 years of work in covered jobs, the Windfall Elimination Provision affects you. According to the Congressional Budget Office (CBO), this impacts about 1.9 million retirees, often reducing their benefits by up to $600 per month.

The Government Pension Offset (GPO)

The Government Pension Offset (also known as GPO), is very similar to the Windfall Elimination Provision. The biggest difference is that this provision reduces spousal or survivor benefits for individuals who receive a pension from jobs where Social Security taxes were not deducted.

Specifically, GPO reduces these Social Security benefits by two-thirds of the pension amount. For those with large pensions, this provision can be incredibly hurtful and reduce benefits to zero depending on your situation. The Congressional Research Service (CRS) estimates that this impacts about 1.3 million retirees.

Why These Changes Matter

For decades, WEP and GPO have created financial hardships for public servants and their families. Here’s why these changes are so significant:

Public Servants Penalized: Teachers, firefighters, and police officers who worked in both covered and non-covered jobs have faced reduced benefits despite paying into Social Security during their careers.

Widows and Widowers Affected: The Government Pension Offset is extremely punitive as compared to the Windfall Elimination Provision because it can eliminate a spousal or survivor benefit entirely. This has left many surviving spouses with little to no Social Security income, forcing some to return to work even in their later years.

Complex Rules: The WEP and GPO provisions are complicated and often misunderstood, making retirement planning more challenging for affected individuals.

What Happens Next?

With the Social Security benefits Fairness Act now officially signed into law, the Social Security Administration is now tasked with the responsibility to implement these new changes. While the Administration has not yet issued specific guidance, based on previous updates, the implementation process could take several months to over a year. Despite how long it may take for the Administration to implement the new rules, it’s important to keep in mind the following:

The Act will take effect for benefits payable after December 2023.

Be retroactive to January 2024, meaning affected retirees will receive back payments for prior months.

Full Social Security benefits will be restored for individuals affected by WEP and GPO.

The system will be simplified, making it easier for retirees to understand and plan their finances.

How Will The Repeal of WEP and GPO Impact You?

If you’ve been affected by WEP or GPO, here’s how the repeal could benefit you:

Increased Monthly Benefits: A retired public servant who worked part-time in a Social Security-covered job could see an increase in monthly benefits of up to $600.

Restored Survivor or Spousal Benefits: An individual who has lost spousal benefits or a widow(er) who has lost survivor benefits due to GPO could regain access to these funds. This could make a huge difference for those who haven’t been able to receive survivor or spousal benefits!

Lump-Sum Payments: According to the legislation, retroactive payments for benefits backdated to January 2024 are expected. It remains unclear whether this could result in a lump sum for 2025 or through another method. However, if it’s a lump sum, it’s important to factor this into your tax planning for the year and how this might impact other strategies that you may be considering such as charitable giving, Roth conversions, and much more.

The Sustainability of the Social Security Program

While these changes bring significant relief to select individuals, they also come at a cost to the Social Security system. The Congressional Budget Office estimates that the repeal will cost nearly $200 billion over the next decade, potentially moving the program’s insolvency date forward by six months, from 2035 to 2034.

We recognize the concern that many retirees have about the future solvency of the Social Security program. Unfortunately, there is a lot of misinformation that surrounds the sustainability of Social Security.

The boring truth is that Social Security is not going away anytime soon. Minor adjustments to the system now could extend the viability of Social Security for years into the future. Raising the age requirements of future claimants, changing how the cost-of-living adjustment is calculated, or raising the maximum earnings subject to the Social Security tax are all viable measures that will have to be considered by our politicians in order to strengthen the Social Security program.

To date, these common-sense solutions have not been implemented because anytime a politician has suggested a change to Social Security, it has resulted in political backlash. Overall, we believe that decisions about your Social Security benefits based on the notion that the program is going broke are both dangerous and irresponsible.

What Should You Do?

Check Your Social Security Statement: Review your benefits to understand how WEP or GPO currently impacts your retirement income.
Verify your contact information. Make sure that your mailing address and direct deposit details are accurate. You can update this information by logging into your account at www.ssa.gov/myaccount.
Plan for Tax Implications: Additional income from retroactive payments could push you into a higher tax bracket. Consider working with a tax professional to minimize the tax impact and coordinate it with any other tax planning strategies you may be doing such as Roth conversions, charitable giving strategies, and more.
Review Your Retirement Income Plan: Additional income from Social Security could reduce the amount you may need to withdraw from your investments, impacting your overall retirement income strategy.
Contact the SSA: If you have never applied for a spousal or survivor benefit because you have been affected by GPO, we would highly recommend that you contact your local Social Security office to apply for benefits. Once Social Security has implemented these new rules, you should contact your local office to ensure your benefits are recalculated correctly.

*For clients of Peterson Wealth, the impact of these changes will be discussed with you during your upcoming meetings with your financial planner.

Social Security Fairness Act: A Step Toward Fairness

The Social Security Fairness Act is a long-awaited step toward fairness for retirees who have been unfairly penalized by WEP and GPO. By restoring full benefits, this legislation provides crucial financial relief to public servants and their families.

If you have questions about how this change might affect your retirement, please don’t hesitate to reach out.

Category: Uncategorized

Reduce your taxes throughout retirement with the Perennial Income Model™