by Ryan McKeown, CPA, Associate Financial Advisor, Wealth Enhancement Group

During retirement, the last thing you need is to pay more in taxes than need be. When considering how much income you will need in retirement, it is not only your living expenses to consider. There is a tax cost on the money you use to pay for your living expenses as well. 
 
Suppose your living expenses are approximately $5,000 per month; most people have a 401(k) or Traditional IRA they have saved money in over the years to pay for their living expenses.  The problem with these accounts is that they are “infested” with taxes that haven’t been paid yet.  If you are in the 32% Federal and State Tax Bracket, you need to take approximately $7,350 out of your 401(k) or IRA to pay for your $5,000 cost of living expenses.  The problem is that you aren’t paying taxes on $5,000; you are paying taxes on $7,350. 
 
A possible solution is the Roth IRA that allows for tax-free distributions in retirement.  With the Roth IRA, you have two options: 1) take $5,000 out of your Roth IRA and have a “tax-free” expense (saving about $2,352)  2) take $5,000 out of your Traditional IRA or 401(k) plan, and take out $1,600 from your Roth IRA to pay the tax on the $5,000 (this saves the tax on $2,350, or about $750). 
 
By planning ahead about which retirement accounts you withdraw from to pay for your expenses, you can control what you pay the government (in this example, $750-$2,350 less). The next time you are looking for bargains with your everyday living expenses, be sure to call your tax advisor to get a deal on your taxes as well.