Minimizing Tax in Retirement

When you are planning how to make your money last a lifetime, minimizing your tax effect on retirement income can play a big part in your strategy. There is no perfect strategy for all, so consider several factors and strategies to make your retirement savings go farther. Your income needs at retirement could vary significantly, making some strategies more beneficial than others. Here are some strategies to consider with your advisors when making your plan for retirement:

Before Retirement:

  1. Avoid early withdrawal penalties by not withdrawing funds from your traditional IRA before 59 1/2. You may, however, take a penalty-free 401(k) withdrawal beginning at age 55, if you separate service with the sponsor employer at age 55 or later.
  2. Invest in a Roth 401(k) or IRA. Roth accounts give you the advantage of tax-free investment growth and tax-free withdrawals in retirement.
  3. Save money in investments outside of retirement plans. Tax efficient investments, such as non-taxable interest generating investments or long-term capital gains generating investments, will provide income at a favorable rate or tax-free, lowering your bill at retirement.
  4. Roll over 401(k) accounts to other qualified accounts such as traditional IRAs to avoid the withholding at roll-over.

After Retirement:

  1. Make sure you make the required minimum distributions once you reach age 70 1/2 from your traditional 401(k) and IRA. The penalty for missing this distribution is 50% of the amount that should have been withdrawn.
  2. Avoid two distributions in the same year from your IRA or 401(k) if they are not needed. You must make your first required minimum distribution by April 1st of the year after you turn 70 1/2. The second and all subsequent distributions must be taken by December 31st each year. If you delay your 1st distribution until April, you will be required to take 2 distributions in the same year. This could cause you to be in a higher tax bracket.
  3. Take smaller distributions from your traditional IRA or 401(k) before they are required. Tapping into retirement accounts earlier will make required minimum distributions smaller in the future.
  4. Donate your distributions to charity. You can make a contribution of up to $100,000 directly from your IRA to the qualified charity without paying taxes on the withdrawal. This withdrawal will also satisfy the minimum distribution requirement.
  5. Make strategic withdrawals across many accounts. Plan your distributions from the various savings vehicles you set up before retirement to ensure the lowest tax bracket for the income level you need during retirement.
  6. Consider your state of residency. Some states have a much more favorable tax structure or no state individual income taxes at all, such as our great state of Nevada. Tax brackets aren’t the only consideration – cost of living, property taxes, insurance and climate are a few – when contemplating moving, but, after looking at the overall picture, you may find you are better off living somewhere new.

Minimizing tax in retirement is an art best left to the professionals. With so many rules we don’t expect you to handle this on your own. Our financial consulting firm in Las Vegas will take care to prevent any extra fees or taxes when helping you plan your retirement. Call FAL at 702-870-7999 today.