Tax Strategies In Retirement
Get the most out of your savings by using withdrawal strategies to help minimize tax impact
Every dollar counts when you are no longer receiving a regular paycheck. Many retirees aren’t aware of strategies they could be using to help minimize the tax bite on their retirement account withdrawals. The money you lose to taxes will be largely determined by how and when you choose to withdraw from retirement accounts like 401(k)s and Roth IRA accounts. A little planning can go a long way when it comes to managing your tax obligations in retirement.
The retirement withdrawal strategies below are simply considerations you should make and only a few broad examples. There are a wide variety of factors that can affect your tax situation.
There is no one-size-fits-all advice and your preferred strategy will depend on your unique goals and financial circumstances. A great way to create a personalized retirement tax strategy is to consult with a retirement professional at Absolute Retirement Solutions.
The Traditional Strategy
The conventional method that you’ve likely heard is to start by withdrawing from taxable accounts, then move to tax-deferred accounts, and withdraw from tax free accounts, like Roth IRAs, last. The logic behind this approach is that it gives your tax-deferred accounts more time to grow. The potential downside is that it may also result in you having to pay more in taxes in the early years of retirement when your income may also be higher.
This retirement tax strategy is still effective for many retirees depending on their personal situations. However, there are alternative retirement withdrawal strategies that may be more effective in some cases.
Proportional Retirement Account Withdrawals
One potentially tax-saving strategy is to withdraw from all retirement accounts proportionally, every year. This produces more consistent taxes over the years of retirement by spreading out taxable income evenly. It can also reduce the overall tax impact dramatically compared to the traditional strategy.
Long-Term Capital Gains
Tax rates on long-term capital gains made from investments depend on your taxable income and filing status. If you are expecting to receive enough long-term capital gains from your investments to reach the 15% bracket threshold, you may want to use up taxable accounts before tapping into your other retirement accounts. Then, you can withdraw from tax-deferred and other tax free accounts proportionally. This strategy takes advantage of low capital gains rates (even 0%) that are available based on your income tax bracket.
Review your options and create a customized retirement tax strategy
With a variety of retirement accounts in your portfolio and a well-informed strategy, you can reduce the impact of taxes on your retirement accounts and have more to spend. These are just a few examples; the tax strategy that will benefit you the most is dependent on a variety of factors.
Speak with a retirement services professional at Absolute Retirement Solutions to learn more about how we help our clients live well and retire with confidence.
Withdrawals from qualified plans are generally subject to ordinary income taxes, and if taken before age 59-1/2 may be subject to an additional 10% federal penalty.