Most people don’t expect their taxes to disappear in retirement, but they may assume they’ll decrease substantially. However, this may not be the case. Between collecting Social Security, interest, dividends, and Required Minimum Distributions, your retirement income could be substantial. All of these types of income can be subject to tax, and there are strategies to help minimize those taxes. Before you retire, it can help to find out if your tax burden will decrease in retirement.
You might want to give the money in your 401(k) or IRA more time to grow once you retire. However, keep in mind that at age 70 ½ you will most likely have to start taking withdrawals. Required Minimum Distributions are based on your life expectancy and account balance, and encourage withdrawals from your account. In some cases, RMDs could push you into a higher tax bracket, which could mean that more of your retirement savings go towards taxes.[1] Fortunately, there are other options for investing accumulated wealth that don’t have strict rules regarding withdrawing funds. Talk to your financial advisor to learn more about some of those strategies.
One reason why it’s important to consider your tax burden in retirement is that tax rates are prone to fluctuations. If there’s a potential tax increase when the Tax Cuts and Jobs Act expires in 2025, or if there is new legislation in the future, how will it affect you and your savings? No one knows what taxes will be like in 10, 20, or 30 years, and that’s why when it comes to taxes, plan for your future self.
There are multiple tax strategies available, and everyone will require a different kind of strategy depending on their circumstances. One common strategy that you may have heard of is to convert part, or all of your traditional 401(k) or IRA into a Roth IRA. You pay taxes on contributions to a Roth IRA, and then withdrawals are taken tax-free. And, unlike with a traditional IRA, you are never subject to Required Minimum Distributions.[2] Having both a Roth and a traditional retirement account can be part of a plan to help minimize your taxes in retirement. This is just one of many opportunities that may be available to those planning for, or are currently in, retirement. Make sure to talk to your financial advisor to find the strategy best suited for you.
We don’t ignore our clients’ future tax burdens when helping them create a retirement plan. A comprehensive plan takes all types of retirement income and how they are taxed into account. We offer complimentary financial reviews so that we can meet you and learn more about your unique financial situation and retirement planning needs.