Taxes are an unpleasant reality in retirement.
In retirement, you rely on the money you saved to become your income.
These sources could take a serious tax hit.
According to a recent Forbes article titled “Want To Cut The Taxes In Your Retirement Money?,” this can be minimized.
First, you need to understand different investments and how they are taxed.
Interest on CDs is taxed at your marginal tax rate.
This rate could be as high as 39.6 percent.
You could also use a tax deferred account to save for retirement.
A 401(k) or traditional IRA would fall into this category.
How are these taxes handled?
The savings will be not be taxed when deposited.
Instead, they will grow tax-free until you make withdrawals.
They will be taxed at your ordinary income tax rate at the time of the withdrawals.
How much can you contribute to these accounts?
For an employee sponsored account, you could save up to $18,500 each year.
Are you older than 50?
If so, you can contribute an additional $6,000 each year.
The amount you can save in a traditional IRA is far less.
These are capped at $5,500 per year with just a $1,000 catch-up contribution for those over age 50.
Not surprisingly, there are several rules specific to retirement accounts.
Withdrawals from these before age 59½ with incur a 10 percent penalty.
On the other hand, you will be penalized if you do not take your full Required Minimum Distributions (RMDs) after age 70½.
The penalty, you ask?
The penalty is 50 percent of the RMD you should have withdrawn, plus the income taxes on same.
Are there other options?
You may be eligible to save in a Roth IRA or a Roth 401(k) account.
If you make above a certain amount annually, you will be ineligible for one of these accounts.
With Roth IRAs or Roth 401(k)s, your deposits will be made after taxes.
This means your earnings and your withdrawals will not be taxed when withdrawn, unless you trigger a penalty.
You may still receive a penalty if you make withdrawals before age 59½.
However, this will only happen if you remove more than you contributed.
As you can see, there are several tools at your disposal for retirement planning.
Working with an experienced estate planning attorney and financial advisor can help you create a plan to best meet your tax-efficient retirement objectives.
Reference: Forbes (August 10, 2018) “Want To Cut The Taxes In Your Retirement Money?”