Benjamin Franklin said it best: There are only two things you can be certain of in life—and one of them has nothing to do with life. The other one that Ben had in mind is taxes.

Wouldn’t it be terrific to think that with retirement, you could retire the idea of worrying about taxes? Unfortunately, quite the opposite is the case. Enter Social Security. Enter how to take retirement income distributions. Enter estate planning so your heirs aren’t socked with a huge debt to Uncle Sam. It’s not about what you receive in pre-tax income. It’s all about what you keep, after the government gets its share.

The following are five strategies for keeping as much as you possibly and legally can. Please keep in mind that this is an overview. Any in-depth tax planning should be done only with the advice and guidance of your tax advisor.

• Never Forget, It’s the Net
• Distributions: How to Keep What’s Yours
• Be Tax-Smart in Your Asset Allocation
• Be Tax-Smart if You Continue to Work
• Don’t Go It Alone

Strategy # 1 – Never Forget, It’s The Net
It’s not what you earn—it’s what you keep. If you’re planning to receive a retirement income of $5,000 per month, or $60,000 per year, you’re still in the marginal federal tax bracket of 25% (if you are a single filer). So rather than an annual income of $60,000, you would need to receive closer to $76,000 in order to net out to $60,000.

That’s why we say that you need to plan to the “net.” What appears to be a comfortable gross income does you no good if the government reduces it to something you can’t live on.

• Take an inventory of all potential sources of retirement income. These could include company pensions, 401(k), 457, or 403(b) accounts, IRAs, Social Security, annuities, and personal savings.
• Determine the current tax treatment for each and what it might be if your income sources change. If you plan on continuing to work, your bracket may stay where it is, but may also decline quickly when you stop. 
• Determine which assets are subject to required minimum distributions. These distribution rules apply to many retirement plans and generally start on the April 1st following the year you turn 70½.
• Create a plan for withdrawals to minimize taxes—now, and when you pass assets on to your heirs.

That means you have to stay invested, and you need to invest in a mix of assets—stocks, fixed income, money market funds—that continue to provide a return in order to achieve your personal financial goals. That may mean taking some prudent risks with your investments.
 
And, as with all other investment decisions, you need to keep an eye on taxes. You also need to know what types of accounts make the most sense. For example, as long as you are working, it may be better to put as many of your assets as possible in tax-qualified accounts in which the tax on income and gains is deferred until you are at retirement age when, presumably, your distributions will be taxed at a lower marginal tax rate. The other main advantage of tax-qualified plans is that any gains that otherwise would have been eroded by current taxes would be left to accumulate, so your account can grow faster.

Finally, many tax-qualified accounts like IRAs, 401(k), 457 or 403(b) plans allow for pre-tax contributions that are excludable from current income for federal income tax purposes.  Contributions can also be made on a pre-tax basis for certain city and state tax purposes. This gives you a tax break on the front end as well.

You need to be careful. Continuing to work after retirement while receiving Social Security benefits requires careful consideration. For example, if you have not yet reached full retirement age (currently falls between age 66 and age 67, for those born after 1942), Social Security benefits are reduced by $1 for every $2 of earned annual income over $13,560 for 2008. If you have reached full retirement age, benefits are reduced by $1 for every $3 of earned income over $36,120 in the year you reach full retirement age for the months up until you reach full retirement. After you reach full retirement, there is no reduction in benefits because of earned income. Also, a portion of your Social Security benefits may be taxable if your modified adjusted gross income exceeds $25,000 for single people and $32,000 for couples.

Strategy # 5 – Don’t Go It Alone.
Investing and sorting through its tax implications can be enormously complicated. And the stakes couldn’t be higher. The landscape and your personal situation are in a constant state of change. Be sure to retain a qualified investment advisor and consult him/her when it comes to tax decisions.

* Source: www.hellodollar.com. October 2005
** Source: Copyright 1995-2004, AARP.  All rights reserved.