Will I be paying taxes when I retire? It’s a question you should definitely be considering.
This is where being smart about tax planning for retirement comes into play. You can enjoy your golden years without the worry of paying taxes and preserve your life’s savings to continue living in comfort. The secret lies in putting proactive tax planning in place since you must still pay your taxes, even if you retire.
But there are clever ways to avoid dipping into your savings before age 72.
In any case, you will be required to contribute towards taxes up to this point with at least a minimum amount. This is where the required minimum distribution enters the equation. You need to take note that you might have to pay taxes on the money you withdraw before retirement age. This will reduce the value of your retirement savings.
With 10,000 baby boomers retiring every day, there’s a high risk of them putting a strain on Social Security and Medicare benefits. These in turn will impact the federal government. The possibility of taxes increasing during your retirement could have a negative impact, so it’s time to find smart ways for tax planning and retirement.
You might gain better insight by enlisting the services of a tax expert to specifically tackle your situation.
4 Ways to Manage Tax Planning for Retirement
1. Company-Sponsored Contributions for Retirement
Is your company retirement plan going to be the best way to save for your retirement? Although company retirement plans are great for saving for retirement, are they tax efficient?
If you are 59 ½ years and older, you could benefit by considering a partial in-service rollover. This could be a clever way to get tax-smart. By moving some of your retirement funds out of your 401(k)— while remaining an employee— and into an in-service rollover, you could be in a better position while investing your hard-earned cash.
An IRA meanwhile will enable you to pick and choose from a wide range of funds, something you can do long before you retire. This is a great way to start investing and saving while you are still working and earning. Nice to know is that more than 70% of 401(k) plans permit a rollover of this nature. One of the biggest advantages of choosing a rollover is the ability to diversifying your traditional investments during your working years.
You should consider the complicated nature of rollovers, though. Know that there is a lot of admin involved, and you will not be able to access your funds immediately.
2. Roth IRAs
A Roth IRA (Roth Individual Retirement Account) is an individual retirement account that allows qualified withdrawals. These are on a tax-free basis and comes with certain conditions. IRAs were created in 1997 and named after William Roth, former Delaware Senator.
Roth IRAs are a specific type of IRA funded with your after-tax dollars if you are still working. They are exempted from RMDs (Required Minimum Distributions). You are not required to pay taxes on the distributions you take in retirement. Nice to know is that by converting some of your 401(k) or traditional IRA into a Roth IRA, you can pay the taxes on that portion of your retirement account, often before you retire.
This will mean that more funds will be accessible to you when you most need them. You will be able to watch your assets grow tax-free. You won’t have to worry about paying taxes on your RMDs or on your withdrawals in the years to come.
Roth IRAs are excellent for people who are more flexible about paying their taxes. This might not be a workable solution for those that are not financially flexible.
3. Life Insurance
Life insurance is a brilliant way to save for your retirement years. You will be able to withdraw and borrow money against the policy. This borrowing and withdrawing funds from your policy is a tax-free income source, making it a flexible way to access funds. This is in particular if you have already used up your accessible money available through your company retirement plan, or through your IRA.
Should you incur health care costs during your latter retirement years, your life insurance could assist. Hybrid policies are especially useful should you experience health care emergencies. In many instances, these hybrid policies have readily available cash for long-term care, and often exceed the death benefits of the policy.
Your life insurance policy could be whole life insurance, a hybrid policy, it could be variable, or it could be universal. Remember to read the fine print carefully and to do the math. Some policies are expensive to service as the monthly premiums could be unaffordable. Bear in mind that accessing these funds could be difficult, plus you might have to pay penalties to transfer or to withdraw any money.
4. Annuities
Investing in retirement annuities is a long-term option for earning a guaranteed amount annually. A fixed index annuity will help you grow your money. These are wholly dependent on how funds are allocated to market indexes. Your initial investment is tax-free and the earnings from the investment will be taxed at normal taxable rates. Should you need to access your funds for emergencies, remember these are illiquid (they are difficult to turn into cash).
Annuities could also be complex and expensive if you would like to draw your funds during emergencies. Always read the fine print before investing money in policies.
A fixed index annuity is a type of deferred annuity that offers upside potential when the market performs and downside protection from a potential market downturn. Your fixed indexes will guarantee some income. These are wholly dependent on any market upturns. Your investment is protected against losses when the market has a downturn.
Should you become incapacitated in some way, your annuity will offer you long-term care. Even if you are unable to eat, walk, or go to the bathroom without being assisted, your investments will have your back.
Finally, annuities are a soft place to fall when it comes to tax benefits during retirement. Funds invested grow on a tax-deferred basis. When you start withdrawing money during your retirement from your annuity, the income paid comes from the initial funds you invested.
With all of these methods available, you should take this as a sign to get your retirement tax planning in order.
Saddock Can Help with Tax Planning For Retirement
Saddock Advisory offers an in-depth look at your financial planning. Our team of professionals is here to make your day-to-day living easier, both now and in the future.
Let us put a watertight tax plan in place by taking an in-depth look at how to achieve this during your latter years. When it comes to managing your money, getting the best professional guidance is certainly worth it.
Get in touch with us here to find out how we can help your specific financial needs.
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