Come January, many officers have no choice but to retire due to the limits of service while in DROP. What you may want to consider, even if you don’t end up choosing this route, is to retire in December for tax reasons. It is far better to make the choice to retire in January after reviewing your options, than it is to determine that retiring earlier would have been beneficial after it is too late.
Tax planning is often overlooked as officers near retirement. Did you know that tax rates are going up next year? The 10% bracket will be eliminated and a higher marginal tax bracket added. And while tax rates are going up, standard deductions are going down next year. What does that mean to you? It means that more of your income will be taxed next year and will be taxed at a higher percentage.
By retiring near year’s end, you may be able to reduce the taxation on your Sick & Comp time. However, there are other things to consider, such as lost wages, a lost DROP payment, picking up healthcare expenses a month or so early. You cannot make an informed decision without looking at all of the consequences of choosing your retirement date.
One goal when tax planning for retiring officers is to level off your marginal tax bracket. What this means is that you try to avoid a spike in your taxable income in any one year. Having a spike in income may mean that you will slide into the next marginal tax bracket, increasing the taxes due on your next dollar earned. Receiving Sick and Comp time over two years or using a Deferred Compensation catch up provisions are two common ways of avoiding this spike in marginal tax bracket. Of course, you eventually have to pay the piper, so if employing these methods, make sure that it is helping your overall tax picture, not making things worse in the future. Work on your tax “exit strategy” now rather than later.
Finally…by now nearly every retiree knows that Deferred Compensation and DROP may be rolled into an IRA without tax being paid. What several officers don’t realize is that these funds will be taxed on withdrawal. They only avoided the tax on the rollover. As part of a tax strategy, you may want to consider a Roth Conversion to create tax-free retirement income and to eliminate Required Mandatory Distributions.
Don’t know where to start? Blue Line Financial Services, Inc. is a wholly owned subsidiary of the Cleveland Police Credit Union. We can help you with your tax planning needs. Frederick Bartin is on hand to meet with retirees and develop a true tax strategy. He understands the intricacies of your retirement system and can help you make an informed decision. He may be reached at 216-621-4440 or (440) 895-9569. You do not need to be a member of the CPCU to utilize his services.
Filed under: Police retirement planning, Taxes Tagged: | Cleveland, CPCU, deferred compensation, DROP, police, retirement
