Retirement Tax Planning
Life does not stop with retirement because there is still much you want to accomplish. That’s why you’ll hear some people argue that real life begins after you retire. But will you have enough cash to fund your needs & wants when that time comes? Have you taken any steps to prevent your pockets from running dry in retirement? If you said no, then you’re not yet late because that’s where the idea of retirement tax planning kicks in. There are various tax planning techniques and resources that can potentially make your life in retirement hustle-free.
What Is Retirement Tax Planning?
Tax planning for retirement entails choosing when to pay taxes on your retirement savings. And saying when here means paying your taxes either when you are still working or after you retire. Tax planning also entails choosing options that will dictate how much you pay in taxes within a given period. The other thing you’ll do during retirement tax planning is choosing appropriate retirement savings accounts. You should get to know strategies and try integrating them into your situation to see if they can help you. And with quality professional guidance, you can get help identifying savings account combinations that align with your preferred tax payment schedule and current tax bracket.
What Is Retirement Tax Planning?
Tax planning for retirement entails choosing when to pay taxes on your retirement savings. And saying when here means paying your taxes either when you are still working or after you retire.
Tax planning also entails choosing options that will dictate how much you pay in taxes within a given period. The other thing you’ll do during retirement tax planning is choosing appropriate retirement savings accounts. You should get to know strategies and try integrating them into your situation to see if they can help you. And with quality professional guidance, you can get help identifying savings account combinations that align with your preferred tax payment schedule and current tax bracket.
Why Is Tax Planning For Retirement Important?
Establishing an effective tax plan can help you on your path to living your ideal life in retirement. It’s true that making informed retirement investment decisions can potentially allow you to benefit from amazing healthcare services in your later years of life. You can also possibly enjoy lower tax rates through appropriate retirement tax planning techniques. Your tax planning choices can also largely influence the accessibility of your retirement investments.
Never forget that some retirement investment accounts offer more diverse investment options. Additionally, some of the accounts have more tax benefits than others. So by planning for your tax retirement, you’re literally defining the course of your finances after you retire. Notably, tax planning for retirement can potentially allow you to make more revenue by choosing investment accounts that can let you run long-term investments.
How Much of Your Retirement Income Will Be Taxable?
You can’t determine your exact taxable retirement income. The taxable amount will depend on the retirement tax plan you’ve chosen. For instance, some retirement savings plans, such as the Tax-deferred and Health Savings accounts, relieve you of the tax burden during your active career. However, having such accounts will mean you’ll pay most of your taxes post-retirement. Therefore, a Tax-deferred or Health Savings account will result in high taxable retirement income.
On the other side, your tax planning approach may lean towards saving mechanisms such as Taxable or Roth accounts. These accounts require you to pay your taxes as you save for your retirement. In other words, your contributions don’t reduce your current taxable income. You save for the future only after you’ve paid the tax, hence the term “after-tax-dollars.” But because you pay your taxes in advance, choosing a Roth or Taxable account will significantly reduce your taxable income in retirement. So the ideal option really is what works well for your current financial status and obligations.
Tax Advantages For Your Different Retirement Accounts
Choosing an appropriate retirement account can lead your way to potential withdrawal tax benefits. The following are the four most dominant retirement accounts and their associated advantages.
Tax-deferred Accounts
Tax-deferred accounts offer multiple savings options, which include IRAs, 403(b)s, and 401(k)s
Tax-deferred Accounts
Tax-deferred accounts are one of the most popular ways of saving for your retirement today. They can benefit you in various ways. For example, any contribution you make to a Tax-deferred account minimizes your current annual taxable income. Moreover, c. And importantly, all your pre-tax gains or contributions won’t be taxed before you retire.
Roth Accounts
With a Roth, you won’t pay taxes for your retirement withdrawals, investment gains, or income.
Roth Accounts
Roth accounts are another great option for your retirement tax planning. One of the most impressive aspects of these retirement savings accounts is the fact that you won’t pay any taxes for your post-retirement withdrawals, investment gains, or income. Also, a Roth account exempts holders from Required Minimum Distributions (RMDs), thus making long-term investments possible.
Taxable Accounts
Taxable accounts allow you to withdraw funds at any time without any penalties.
Taxable Accounts
Like with a Roth account, you’ll pay your taxes as you make retirement savings contributions to a Taxable account. Taxable accounts impress most people because they offer incredible operational flexibility. For example, you can withdraw your funds at any time without explaining the purpose of the transaction or suffering any penalties. Additionally, a Taxable account exposes you to diverse investment options, including stocks and other stable assets.
Health Savings Accounts
HSAs allow tax-free medical withdrawals, and they shrink your annual taxable income.
Health Savings Accounts
Health Savings Accounts (HSAs) might also be your perfect match if you’d like to make your tax planning for retirement more seamless and meaningful. HSAs’ contributions shrink your annual taxable income, which can potentially provide financial relief. What’s more, any investment gains in a Health Savings Account won’t attract any taxes. HSAs also allow tax-free medical withdrawals. Importantly, you can pay for nonmedical bills using your HSA once you hit 65 years of age or older. Health Savings Accounts are also considered a good retirement account for long-term investments because they are exempt from RMDs.
Understand Your Current Tax Bracket, And How It Might Change When You Retire
Your current tax bracket isn’t permanent and will likely change in the future. When this happens, the amount you pay for taxes can also change. This is why understanding tax brackets are vital to any retirement tax planning program. Here are the three possible tax brackets and how your retirement might affect each of them.
Lower Tax Bracket (0, 10, 12%)
This is where most new employees begin. However, some people who have worked for years also fall into this category. It all depends on your profession and what your employer offers you. The current lower tax bracket is the lowest in history, according to records. So you may likely fall into a higher tax bracket post-retirement if you currently fall in the lower category.
Middle Tax Bracket (22, 24%)
The middle tax bracket really is the most complex to understand of the three taxation categories. If you’re here currently, your tax bracket in retirement might fall lower or higher. Therefore, well-designed tax planning could be your best bet for now.
Higher Tax Bracket (32, 35, 37%)
A higher tax bracket might drop to a lower level or remain intact post-retirement. So if you’re currently in this category, you should consider saving to accounts that defer tax payments such as Tax-deferred. Experts add that combining a Tax-deferred savings account with a Roth might favor people who are currently in the higher tax bracket.
Work With TruNorth For Retirement Tax Planning
You can streamline your operations by engaging a professional retirement tax planning agency like TruNorth. Our financial advisors can guide you in choosing savings options that align with your retirement goals.