Taxes are an inevitable part of life, whether you’re still working or you’re retired. When you enter retirement, your funds may be more limited, and you don’t want to get a surprise tax bill when you have less financial flexibility.
That’s why you need to plan ahead for taxes in retirement. Taxes work differently depending on your retirement income. There are five main types you may take in once you have retired:
401(k)s or IRAs
Social Security benefits
Here are some ways you can reduce your tax burden no matter where your retirement income is coming from.
Make Roth Conversions
When you turn 70 and a half, you will have to start taking required minimum distributions (RMDs) from your traditional IRA, whether you want to or not. Sometimes those RMDs are more than you need to live on. Here’s a solution—during your first year of retirement, begin rolling over funds from your IRA, which is a pre-tax account, into a Roth, which is an after-tax account.
Wait As Long As You Can to Collect Social Security Benefits
While you can start getting your Social Security benefits at age 62, while you’re still working, if you can hold off for another eight years, you will gain greater tax advantages. You can take Roth conversions more easily and receive a more favorable rate for capital gains if your income stays lower.
Consider Tax-Exempt Investments
Those in a higher income bracket can benefit from making tax-exempt investments. This covers things such as municipal bonds. While you will get a lower return on some of these than other investments, the lack of taxes offsets some of that tradeoff.
Stay in a Low Tax Bracket to Avoid High Capital Gains Taxes
Dividend and capital gains taxes are assessed based on your income bracket, among other things. If you can stay in a lower bracket, then you will pay less in taxes.
Keep in Mind Rules That Could Lower Tax Payouts
Many retirees have medical expenses to pay, and they may be forced to dip further than they expected into their retirement accounts. If you withdraw more from your retirement than you made in income, you may not have to pay taxes on those withdrawals.
Roll Over Your Old 401(k)s
If you’re still working, you don’t have to take RMDs from your 401(k). By rolling over your funds from previous jobs, you can have them all under one “roof” — and delay any taxes.
Get to Know Tax Laws to Help You Gain the Most From Your Retirement
Staying informed about your retirement options and what type of taxes you have to pay on them will help prepare you for your golden years. You never want to be in a situation where you have less to rely on for day-to-day living because you miscalculated a tax bill.
To learn more about taxes in retirement and how they can impact you, reach out to Jay. He can discuss all these things and answer any other questions about retirement investments.