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Retirement and Tax Planning – Unlock Some Relief

Successful Retirement

A little retirement and tax planning goes a long way to boosting your retirement funds. But beware, tax is a minefield of legislation, emotion and political attitude manipulation.

There are two tax situations you should consider.

  1. Your macro tax environment and the international distribution of your investments and wealth 
  2. The micro-situation with regard to minimizing the tax obligations within your tax residency country (if you decide to have one!).

Since the Middle Ages wealthy people have used trusts to protect their assets. Although more recently trusts have been used together with low tax, and tax-free countries, to reduce, defer or distribute tax obligations.

Many are now starting to look at other options to protect and extend their hard earned savings. People who do not believe they will have enough after tax income in the country where they live. Or a growing number don't believe they are getting value for the tax they pay. 

Personal Taxation Systems

If you live in a country which has a residence-based income tax regime. Countries like South Africa, New Zealand or the US tax your world wide income . So even if you earn no income in the country where you live the government will take a share of your worldwide earnings.

One way to escape from this regime is to adopt a "PT" status. Meaning by either being a Permanent Tourist or a Permanent Traveler. The result is the same: a "PT" is someone who has no fixed base … never actually establishing tax residency anywhere.

As the general definition of a resident for tax is, anyone resident in the country for more than 183 days in a 12-month period. A PT will spend less than 183 days in one country and then move on to another country.

This could result in living an adventurous, nomadic lifestyle financed by your tax savings!

In countries like the UK with sourced-based tax systems UK you only pay tax on the income earned in that country.

Careful consideration and planning of all the tax implications of retirement and tax planning could make a significant impact on the amount of money you retire with. And the amount you have to live on.

Taxation Unfairness

Taxes are often used as political tools resulting in skewed contributions from individuals. For example in the US where only about 50% of individual taxpayers actually pay tax. Or a country like South Africa where you have 22 million voters and 5 million individual taxpayers!.

The other tax concern is that tax laws can be changed at the whim of politicians ... so what is favorable for you today may be unfavorable tomorrow.

Retirement and tax planning will become more important as taxes become more and more onerous. Being increased to meet the increasing welfare and health obligations.

Tax Strategies

Retirees may receive income from a variety of sources. Including social security benefits. Plus distributions from pensions, annuities, IRAs and other retirement plans.

With careful retirement and tax planning and managing the amount and timing of withdrawals you can keep your taxes as low as possible. By using some tried and tested strategies:

  • Take full advantage of deductions and personal exemptions.Together, these represent tax-free income. Reducing tax by offsetting taxable income with mortgage loan payments, real estate taxes, and medical expenses.
  • Speed up retirement distributions when you have excess deductions.If your standard deductions exceed your taxable income, consider withdrawing more retirement funds than you need. By accelerating income when you have a zero or low tax rates, you'll avoid paying more taxes in a future year.
  • Take all credits for the elderly.Special tax credits usually apply to taxpayers age 65 or older. But qualifying for these may take careful planning for your gross income to fall beneath certain limits.
  • Maximize tax-free income.Get the maximum deduction in capital gains when, for example, selling a primary home. Also, interest earned from certain sources may be interest free.

The above are a few selected examples for retirement and tax planning. But each country handles taxes and rebates differently. In each case individual advice should be obtained and evaluated. The tax implications may be further complicated by having many options.

Ensure that you get objective and complete advice. With a second opinion often the best course of action!

If you are resident in the US the publication "Tax Planning for Retirees" provides comprehensive information on tax. It includes sections on elderly and disabled tax relief. Estate and gift taxes on retirement benefits and, retirement benefits of foreign retirees.

There are many publications about international tax. But as this can be very complex my advice is to consult an international tax expert.

Be warned, retirement and tax planning is a very complex exercise … and the one man you don't want to cross, or make cross, is the tax man.