Given the constantly fluctuating economic climate, developing strategic planning methods to ensure a comfortable retirement has become more critical than ever. One such strategy to complement this is tax planning. Effective tax planning before and during retirement can enhance the longevity of your retirement savings by lowering your tax bill. Here are six tax-reducing strategies to consider now.
Retirement account draw-down management
The first strategy is to manage your retirement accounts objectively. Traditional Individual Retirement Accounts (IRAs) and 401(k)s are tax-deferred plans, which means you contribute pre-tax dollars but must pay income taxes on distributions in retirement. On the other hand, Roth IRAs and Roth 401(k)s fund with after-tax dollars, and distributions in retirement are tax-free. You can moderate your tax burden each year by strategically withdrawing from these accounts in a specific order or a combination.
Roth IRA conversions
Roth conversions can also be an effective tax strategy. A Roth conversion involves converting a traditional IRA into a Roth IRA. You’ll need to pay taxes on the converted amount in the year of conversion, but future withdrawals will likely become tax-free, provided certain conditions are met. A Roth conversion strategy may be appropriate if you anticipate your tax rate to be higher in retirement than in the year of conversion.
Tax-loss harvesting
Another essential strategy is reducing taxable income by leveraging investment losses through tax-loss harvesting. A tax-loss harvesting strategy involves selling off investments that have decreased in value to offset the capital gains realized from selling profitable investments. It is crucial, however, to understand the ‘wash-sale’ rule, which states that to claim the loss, you cannot buy ‘substantially identical’ securities within 30 days before or after the sale.
Tax-efficient funds
Investing in tax-efficient funds is yet another strategy to mitigate your tax obligations in retirement. Index and exchange-traded funds generate fewer capital gains and can be more tax-efficient than actively managed funds. They also distribute fewer dividends, making them suitable for taxable accounts.
Annuities
Annuities are another strategy to consider. Purchasing an annuity can provide a stream of income in retirement. Money in an annuity grows tax-deferred until you start receiving payments. At that time, a portion of each payment is considered a return of principal, and the rest is taxable income.
Gifting
Last, consider gifting strategies as part of your tax planning. If your estate is large enough to be subject to estate taxes, gifting during your lifetime can help mitigate these taxes. You can make tax-free gifts up to a specific limit per recipient each year, reducing your ultimate estate value. Visit a financial or tax professional to determine this year’s limit so you can decide if gifting is appropriate for you.
In conclusion, a well-devised tax strategy can significantly lower your overall tax bill in retirement and manage your retirement savings. This article presents just a few strategies available, and it is essential to seek professional advice to find the most appropriate approach, depending on your financial circumstances. Understanding the tax implications on your retirement assets and planning for them can help ensure a more comfortable and worry-free retirement.
https://www.investopedia.com/retirement/tax-strategies-your-retirement-income/
https://www.kiplinger.com/retirement/optimize-taxes-when-you-tap-retirement-accounts
https://www.nerdwallet.com/article/taxes/tax-loss-harvesting
This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The sources used to prepare this material are believed to be true, accurate and reliable, but are not guaranteed. SWG3674379-0724c.
Jeff Heybrock is an Investment Adviser Representative of Coppell Advisory Solutions LLC, dba, Fusion Capital Management, a registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
Insurance and annuity products are not sold through Fusion Capital Management. Fusion does not endorse any annuity or insurance product, nor does it guarantee any insurance or annuity performance. Annuity and life insurance guarantees are subject to the claims-paying ability of the issuing insurance company. If you withdraw money from or surrender your contract within a certain time after investing, the insurance company may assess a surrender charge. Withdrawals may be subject to tax penalties and income taxes. Persons selling annuities and other insurance products receive compensation for these transactions. These commissions are separate and distinct from Fusion’s investment advisory fees.
