The reason why most people unknowingly overpay their taxes in retirement

If you ask people why they pay so much in taxes in retirement, you'll typically hear answers like…

"I have a large IRA."

"I'm taking Required Minimum Distributions."

Or, "There's nothing you can do about it."

But after helping more than 55,000 area families prepare for a better retirement, Tyson Thacker and Ryan Thacker, Founders of B.O.S.S.S Retirement Solutions, say those aren't the real reasons.

"Most people don't overpay their taxes because they saved too much money," Ryan says. "They overpay taxes because nobody ever taught them how to withdraw their money in retirement."

Think about it…

They've probably spent decades learning how to build their retirement savings. They've contributed to an IRA and 401(k). They've learned how to invest their money. They've also learned about asset allocation, diversification, and how to build a nest egg that will hopefully last for the rest of their lives.

"But almost nobody teaches them how to withdraw this money in retirement," Tyson says. "And that's where many expensive retirement tax mistakes begin."

Retirement changes the question

Ryan says many people assume retirement planning ends the day they stop working.

"In reality, that's when an entirely new phase of planning begins," he explains. "Before retirement, the question is simple… Where should I invest my money? But once you retire, the question changes to…. Where should my retirement income come from?"

According to Ryan, that single question may have a much bigger impact on your retirement savings than most people realize.

Which account should you withdraw from first in retirement?

Should it be your IRA or 401(k)? Your Roth account? Your after-tax brokerage account? Or your savings?

"Most retirees have never really thought about it," Tyson says. "Because no one ever explained why it matters."

One withdrawal could trigger a chain reaction of events

The reason why it matters is simple: Every retirement account is taxed differently.

Withdrawing money from the wrong account – or simply withdrawing it in the wrong order – could trigger a chain reaction of events that could cause you to overpay your taxes in retirement.

For example, one withdrawal decision could cause you to pay taxes on up to 85% of your Social Security benefits. It could push you into a higher income tax bracket. It could increase your Medicare premiums. And lead to larger required minimum distributions later in retirement.

"The important thing to understand is that these decisions don't happen in isolation," Ryan says. "All of these things are connected. And one withdrawal decision often impacts several other parts of your retirement plan."

Unfortunately, most retirees never realize this.

"They simply withdraw money from whichever account seems the easiest," Tyson says. "And convenience isn't always the most tax-efficient strategy."

Why most people never learn this

One reason so many retirees overlook withdrawal planning is because the financial industry naturally focuses on helping people accumulate and grow wealth.

"During your working years, almost every conversation revolves around saving and investing," Ryan explains. "Are you saving enough? Are your investments performing? Are you diversified?"

"But retirement flips the conversation. Now you're trying to create income from those savings in the most tax-efficient way possible."

According to Ryan, that's a conversation many retirees have never had before.

What does a coordinated withdrawal strategy look like?

"There isn't one withdrawal strategy that works for everyone," Tyson says.

"For one family, it may make sense to withdraw from a brokerage account first. For another, it may make sense to draw more heavily from an IRA while they're temporarily in a lower tax bracket. And for someone else, partial Roth conversions before Required Minimum Distributions begin may create meaningful tax savings."

"The important thing," he says, "is making those decisions intentionally instead of simply withdrawing from whichever account happens to be most convenient."

Retirement tax planning Is different

Many people think tax planning is simply about finding deductions before they file their tax return.

Ryan says retirement tax planning is very different. "It's really about coordinating dozens of decisions that all influence each other: when to file for Social Security, how to handle Required Minimum Distributions, whether Roth conversions make sense, and where your retirement income will come from."

Those decisions don't stand alone. When they're coordinated, the long-term tax savings can be substantial.

Tyson added, "The goal isn't to simply lower your taxes this year. The goal is to reduce the total amount of taxes you'll pay throughout retirement."

To help people better understand these decisions and discover how much they could potentially save with a coordinated withdrawal strategy, B.O.S.S. Retirement Solutions offers a free, customized Retirement Tax-Savings Analysis.

One of the firm's experienced advisors will show you a side by side comparison of how much money you're projected to pay in taxes now, versus how much money you could save by having a coordinated withdrawal strategy in retirement.

This analysis often reveals significant tax savings for your IRA/401(k) withdrawals, Social Security benefits and other investment income.