Planning for Taxes in Your Retirement Plan

Taxes are a constant even in retirement, so it’s important to start planning for them now. At 210 Financial, we emphasize the importance of having a plan. But what does that entail exactly? You can begin by analyzing your tax strategy now and then learn more about other ways to improve it. Integrating tax planning into your retirement strategy can help you develop a comprehensive and well-considered plan. 

Learn More: Planning for Retirement  

Do you have a strategy for tax season now?

Here’s a crazy reminder: tax season is only six months away, and planning is especially important in retirement! Whether you’re on track with your tax strategy or need a fresh approach, now’s the time to assess and adjust. What did you do last year? What do you want to do differently this year? 

 Tax planning is so important that the very first episode of The 210 Retirement Blueprint Podcast talks about preparing for tax season. 

Learn More: Watch or listen here! 

Observe taxes and retirement planning from all angles: 

1. How much of your income will be taxable? To answer this, you must consider your income sources in retirement outside of just your savings. Will you receive Social Security benefits, pensions, non-retirement investments, or other sources of income? Understanding which of these are taxable is crucial for effective planning. 
2. What will your tax rate be after you retire? The tax rate you face today might not be the same in retirement, and it’s wise to be prepared for potential increases. What does that look like? Working with a financial planner can help you navigate these uncertainties and plan effectively for any unexpected tax burdens in retirement. 

Diversifying Your Accounts: 

Diversifying your accounts can offer multiple benefits as you plan for the future. A well-diversified portfolio gives you more control over your finances both now and down the road. It can help extend the longevity of your savings and better protect your assets. Diversification becomes crucial as life events unfold, and a diversified approach can provide the stability needed to adapt to these changes. 

Utilize Tax-Advantaged Accounts:

In this section, we’ll cover 4 types of accounts, each offering unique tax advantages. What works for someone else might not be the best fit for you, so it’s crucial to personalize your plan. Tailoring your approach ensures that you’re maximizing all the benefits according to your financial situation and retirement goals. 

• Tax-deferred accounts:   

These accounts include 401(k)s, 403(b)s, and traditional IRAs. They offer the benefit of tax deferral, allowing you to save money upfront by postponing taxes until retirement when you begin making withdrawals. It’s a significant advantage for those looking to reduce their current tax burden. 

The IRS requires you to withdraw starting at age 73 with the required minimum distributions or RMDs from tax-differed savings accounts. The only way to delay RMDs beyond this age is if you’re still working and your funds are in your employer’s retirement plan. This rule makes it crucial to plan your withdrawals carefully to avoid unexpected tax implications. 

• Roth accounts:  

These accounts include Roth 401(k)s and Roth IRAs. Roth accounts stray from tax-deferred accounts because they use post-tax dollars. This means that when you withdraw money in retirement, you won’t owe taxes on the gains, income, or withdrawals. One key advantage of Roth IRAs is that they are exempt from required minimum distributions (RMDs), allowing your money to grow tax-free for as long as you like—unless the account is inherited. 

• Taxable accounts:  

If you like the sound of after-tax-dollar funded accounts, traditional bank and brokerage accounts operate similarly. In brokerage accounts, you can sell securities and contribute or withdraw money anytime and for any reason with no penalty.    

• Health savings accounts:   

A Health Savings Account or HSA isn’t your average retirement account but has benefits that you can use to help reduce your taxable income. A HSA is a tax-advantaged investment account designed for medical expenses. Contributions to an HSA are tax-deductible, which can lower your taxable income. You can use the funds for qualified medical expenses, including co-pays, co-insurance, and prescription drugs. Making an HSA a valuable tool for managing healthcare costs while enjoying tax benefits. 

Knowing your Tax Bracket:

Another factor to consider when selecting retirement accounts—or deciding if you should have multiple accounts—is understanding your tax bracket. Knowing where you stand tax-wise can significantly impact your retirement strategy. It’s wise to discuss your tax bracket with your advisor to ensure you’re making the most tax-efficient choices for your future. 

Check out our complementary 210 retirement blueprint process: Schedule a meeting today!    

Consider a Roth conversion:

The main difference between a traditional IRA and a Roth IRA comes down to when you pay taxes. With traditional IRAs and 401(k)s, you defer taxes until retirement and until required minimum distributions (RMDs) begin. The concern is whether taxes will be higher or lower when you start withdrawing funds, especially since the accumulated amount can be significant.  

A Roth conversion offers a strategy to address this issue. It might sound counterintuitive, but converting funds from a traditional IRA to a Roth IRA allows you to pay taxes on the converted amount now, potentially saving you money in the long run. This process enables you to manage your tax liability proactively and keep more of your money working for you in retirement. You might feel like this doesn’t apply to you now, but when it’s time to start withdrawing, you could find yourself owing more in taxes than you anticipated. 

Learn more: Tax-Season Resource Roundup 

Conclusion:

Developing a personalized retirement plan that includes comprehensive tax planning is essential. By preparing now with the guidance of a financial advisor, you can help avoid surprises later. A well-structured plan may assist you in making informed decisions that will protect your financial future and allow you to enjoy a more secure retirement. 

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210 Wealth Management, Inc., d/b/a 210 Financial, is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. 210 Financial, Form ADV Part 2A & CRS can be obtained by visiting: https://adviserinfo.sec.gov and search for our firm name.  Insurance products are offered through 210 Financial, Inc. d/b/a 210 Financial.