There are certainly plenty of ways to keep as much of your hard earned money from Uncle Sam as possible using the tax codes. One thing you have to keep in mind however is that, after years of accumulating assets without giving him his due, you can bet you’ll be seeing your dear old uncle during retirement.
There are still ways to minimize what you’ll have to give however, and below are the things you need to watch out for so that you keep as much of your money as possible during retirement, as well as some excellent advice. Enjoy.
Since you’re not required to withdraw money from a traditional IRA and 401(k) until age 70 ½ or older, many people make the choice to defer taxes and give their money more time to accumulate interest. The problem is that in some cases you can actually pay a lower tax rate on your distributions by withdrawing smaller amounts of money over a longer period of time. Ask your financial advisor to help you factor in the taxes you pay on your 401(k) and IRA distributions and see which strategies result in the lowest tax bill.
Many consumers find it hard to pass up the big tax break of pretax accounts, but having a number of accounts where you do prepay taxes (like a Roth IRA) will save you from getting a huge tax bill once retirement rolls around. You may want to consider converting pretax assets to a Roth during a year when your income is particularly low, for example.
Many consumers also forget that their IRA and 401(k) withdrawals are considered income and, if they withdraw too much, their tax breaks can be phased out. If your retirement income is coming close to the limit for tax breaks, you may want to adjust your withdrawal strategy to make sure you don’t lose your eligibility for credits and deductions.
Using a windfall to pay off the taxes in a pretax account is an excellent idea to reduce your tax liabilities during retirement. Using the money from, for example, your stock returns to pay off some of those taxes, since you have the extra income available, is a shrewd financial move.
The extra income you get from Social Security acts as an “income floor” that could bump you into a higher tax rate, so don’t forget to include the taxable portion of your Social Security income into your retirement calculations. The fact that Social Security and other inflation-adjusted payments will increase over time should be factored in as well.
Finally, keep in mind that there are a number of scenarios where tax deferral actually doesn’t make as much sense as you think, even though being able to defer taxes might seem like it’s the best idea right now. If it’s too complicated to figure out on your own, sitting down with your financial advisor to figure out your retirement savings options and strategies is one of the best way to significantly increase your retirement spending power.
Speaking of financial advice, if you have questions or need help with your personal finance goals, let us know with a comment or email and we’ll get back to you ASAP.