Looking Ahead To Minimize Taxes In Retirement

Developing a strategy to minimize taxes for the current year is fairly straightforward. Tax planning for next year is a bit more difficult, but planning for the distant future becomes increasingly complex because of the many variables involved. Individuals can, however, choose certain options during their working years to lay the groundwork for minimizing taxes in retirement.

Unless you are a participant in a traditional pension plan, you will likely be able to access many of your retirement assets at age 59 1/2 without penalty. Even though there is not an early withdrawal penalty at that age, the ideal goal is to conserve the funds for as long as possible. When you decide to partially or completely stop working at some point, it will likely become necessary to make withdrawals from one or more types of retirement accounts.

Traditional pensions

An overarching strategy to minimizing tax is to avoid a concentration of taxable withdrawals in any one particular year. If you become the recipient of a traditional pension, the annual payment amounts are likely to remain relatively constant over the years. Even though the taxable income from a pension cannot be changed, it must be factored into your decision of when to receive other retirement distributions.

Individual retirement accounts

After age 59 1/2, financial planning flexibility is enhanced by having IRAs on both a pre-tax and a post-tax basis. If you are eligible to make IRA contributions during your working years, you can split your allowable contributions between a traditional IRA and a Roth IRA. A Roth IRA is post-tax, meaning that taxes are paid on contributions up front. The valuable feature of a Roth IRA is that distributions are tax-free, including the accumulated earnings.

A traditional IRA is pre-tax, so tax is deferred on the contributions. Tax is also postponed on the earnings until distributions are made. Unlike a Roth IRA, the full amount of a distribution from a traditional IRA is generally taxable. Since distributions from a traditional IRA increase your taxable income, you might choose to take them during years in which they have the least effect on increasing your income tax.

401(k) plans

For tax purposes, the typical 401(k) account is treated similarly to a traditional IRA. Contributions are tax-deferred, and distributions are fully taxed when received. An important reminder to 401(k) participants is to understand how to maximize the amount of any matching contribution available from their employer.

Social Security income

Social Security income is potentially taxable. If your other sources of taxable income exceed a certain threshold, a portion of the Social Security income may be taxable. Social Security payments can be delayed for a few years if the delay helps optimize your overall retirement strategy.

For more advice, reach out to retirement planning services like Estate & Financial Strategies, Inc.

About Me

All About Loans

Hi there, my name is Fanny Castile. Welcome to my website about acquiring and repaying loans. When I was looking for a new car, I was stunned to see how much the vehicles were going for in the style I wanted. I needed a vehicle that would help me transport my business gear and take my dogs on fun excursions on my off days. To acquire the vehicle I needed, I took out a loan. Throughout the loan acquisition and repayment process, I learned a ton of information about this subject. On this site, I will share my knowledge with you all to help everyone approach the loan process with ease. Thanks.




Latest Posts

26 December 2019
A reverse mortgage is designed to allow elderly individuals to borrow against the equity they have in their home. It essentially allows you to enjoy t

21 October 2019
One thing that many young adults and parents of young adults agree about is the fact that the public school system doesn't always prepare students for

26 August 2019
Where you decide to do your banking can have a direct impact on your financial success. Credit cards can be valuable tools in building your credit and