PLANSPONSOR - June/July 2018 - 16

Upfront
Income Taxes Follow Participants
AS MORE American workers are
expecting to rely on defined contribution
(DC) plans and individual retirement
accounts (IRAs) to fund their retirement
years, concerns are growing about how to
best manage lifetime income streams.
As part of this effort, says Daniel
D'Ordine, founder of DDO Advisory
Services, late- and even mid-career retirement
savers should start doing much
more advanced planning for how they can
minimize income taxes in retirement.
Depending on where they live and how
they structure their retirement income,
retirement savers may find themselves
paying unexpectedly high amounts of
taxes each year to both the federal and
state governments, D'Ordine advises.
Should a retiree's income stream
stem mostly from Social Security, it
would be unlikely he will pay a great deal
of income tax, D'Ordine says. However,
if the individual has accumulated other
significant sources of income, such as a
401(k) or defined benefit (DB) plan, then
taxes will be assessed on what is called
" combined income. " Depending on how
the public and private sources of income
are structured, the federal government
can assess taxes on up to 85% of one's
Social Security benefits, contingent on
combined income and other factors, such
as marital status.
At the state level, taxes on retirement
income will also vary based on the
participant's sources of annual income.
Currently, 13 states levy their own taxes on
Social Security. Depending on the income
source and the state's legislation, DC and
DB plan participants can also expect to
pay-or possibly be exempted from-
taxes on military retirement income or
pension income. Northern states are
known to have higher property, income
and sales taxes, generally speaking,
D'Ordine adds.
There is much to help with planning,
today, from a tax-optimization perspective-even
for those in their 20s, 30s and
40s, the experts agree.
The first step to mitigating future
tax expenses, according to Angie O'Leary,
16 PLANSPONSOR.com June-July 2018
Art by Adam McCauley
head of wealth planning at RBC Wealth
Management, is to consider diversification
with respect to account types and
their prospective tax requirements.
Employers, for their part, can establish a
Roth IRA option.
" There are strategies of rolling some
amount of traditional 401(k) dollars over
into a Roth IRA that are potentially advantageous,
especially if you have a couple
of years where your income is lower, "
O'Leary says. " Having tax diversification
available down the line is really helpful in
building that paycheck in retirement. "
According to D'Ordine, participants
often have questions about the tax burden
associated with annuities. Those who
buy a lifetime annuity with a lump sum
of money are guaranteed to receive a set,
predictable payment throughout retirement,
but how will this be taxed?
" Annuities add some security and
take a bit of the pressure off, " D'Ordine
observes. " Much of the monthly payment
in this case will be considered return of
premium, but the rest of it will be taxable.
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PLANSPONSOR - June/July 2018

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