Want to Retire Early? Here’s How!

Want to Retire Early? Here’s How!

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While the idea of retirement is something most people hope is still a long time away, they also look forward to it being a time to relax, and an opportunity to finally check out of the workforce.

Good financial planning can only get you so far, however. You should also take advantage of things like the tax code. Doing so can help you potentially reach your retirement goal sooner than later.

Here are a few tax tips to keep in mind in order to achieve that goal:

Tax-Free Retirement Choices

You should consider tax-free retirement choices, such as Roth IRAs and Roth 401(k)s. With Roth accounts, you can invest money in your plan using after-tax dollars. However, any earnings are tax-free as long as you follow withdrawal rules.

This might lower your potential initial investment, but it can create a source of funds that have the potential to earn money without being taxed in the future. Because tax rates might go up during your retirement years, you can always consider adding a Roth IRA in your retirement portfolio.

Benefits and Deductions to Consider

There are benefits and deductions you can consider before you reach the age of retirement. Those can include:

  • The taxability of certain retirement benefits, such as Social Security
  • The timing of when you should commence Social Security benefits
  • The additional standard deduction after you reach the age of 65
  • The impact that Medicare and Medicaid plans can cause
  • The credit for being disabled/elderly

Consider State Taxes

When piecing together your retirement plan, don’t forget to consider state taxes in the area that you wish to live. Of course, all states aren’t created equal. Some states have income state taxes in excess of 10%, whereas others have no state income tax at all.

Choosing a state to retire in in the future can be beneficial since many states try to take the position that you should pay them state taxes on all retirement plan withdrawals using money earned while you lived in that state, even if you moved away a decade earlier.

Maximize Retirement Accounts

Maximizing tax advantaged retirement accounts, such as traditional IRAs and 401(k)s can allow qualified taxpayers to invest their pre-tax money and not pay taxes until their retirement years when the funds are withdrawn.

The IRS will still receive taxes on your earnings and income, however, they delay receiving those funds until the future when you chooses to withdraw them.

As a result, the IRS will allow you to invest their potential tax receipts along with your own money, and will then take their share of your investment earnings at a later date.