Ways to Minimize Taxes in Retirement

Ways to Minimize Taxes in Retirement

Adobe Stock

Have you ever thought about the impact of taxes when you start planning for retirement? Everyone knows that the sooner you start to save up for retirement, the better, but not everyone thinks about how taxes might play a role. In fact, the Nationwide Retirement Institute found out that 35 percent of current retirees didn’t consider how their taxes would affect their retirement in their Tax-Efficient Retirement Income Study. Whether or not you’re just now starting to think about retirement or if you’re already retired, here are five tips to help ensure that you’re saving as much money as possible:

Understand the Benefits of Tax Diversification

When controlling how much you pay in taxes, tax diversification is an important step. In other words, much like how you would diversify investments across different asset classes, you can also diversity different types of taxation. This allows for more flexibility.

Know the Required Minimum Distributions (RMDs)

After you’ve reached a certain age, you’ll need to begin taking required minimum distributions (RMDs) if you have a traditional IRA or a 401(k) plan. If you turn 70 ½ in 2020 or later, the SECURE Act will allow you to take your first RMD by April 1 of the year after you reach 72. Most importantly, just make sure you have a plan in place to help you manage RMDs. Hiring help from a financial professional can help you save thousands.

Understand the Differences Between Retirement Savings

There are many different retirement savings accounts and qualified plans that can provide tax advantages. However, they vary in several ways. What you’ll want to do is consider the impact of required minimum distributions and how a retirement savings account can help. Some of those plan options include Roth IRAs, Roth 401(k)s and 401(k)s.

Know Why Asset Location Matters

One of the biggest ways to minimize your taxes is to understand that not all investments have the same tax impact. Some are simply more tax-efficient than others, and asset location is a proven strategy that can help minimize the impact of those taxes. If you’re a higher tax bracket, those tax savings can be substantial and you can potentially increase returns without increasing risk.

Think About Roth Conversions

Once you’ve already retired, your tax liabilities could begin to increase. This can happen as a result of large RMDs or delayed social security payments. This is where a Roth conversion can come in handy, since it can help you generate more tax-free income while in retirement and could also lead to a lower tax rate in the future.Ways