Tax Strategies
What does retirement planning mean to you? For most of us, it means creating and following effective savings and investment strategies, so we’ll have enough resources when we retire.
But what about tax strategy? Shouldn’t efficient tax strategies be an important element of your long-term financial plan? After all, the greater your cash flow is the more money you’ll have for your retirement savings.
We are not talking about taking advantage of tax write-offs to increase your income tax returns, though that does help. In this case you do not need a CPA because you are not getting your taxes prepared. Instead, a skilled investment professional with extensive knowledge of effective tax strategies can help you design an advantageous tax plan for your ideal retirement.
It is important to note that whether your retirement income withdrawals can push you into a higher tax bracket entirely depends on the type of account you have. All income you earn after your retirement, be it from rental properties or part-time employment is fully taxable at what your normal income tax rate was. For example, if you filed as single and your income is $25,000 to $34,000, you can expect to pay income taxes on up to 50% of your Social Security benefits. For those who filed jointly, and your combined income runs over $44,000, up to 85% of their Social Security maybe be subject to income taxes.
Tax Strategies for Retirement Income
One way to devise tax strategies that enable you to meet your retirement goals is to use accounts that deliver different tax benefits. That way you can really dial in your taxable income throughout your retirement.
Generally, there are three primary account types to consider depending on the tax advantages you wish to implement.
Tax-Deferred Accounts: Traditional IRAs, 401(k)s and 403(b)s are common tax-deferred accounts. The main benefits of tax-deferred accounts are the reduction of your taxable income before taxes and deferring taxes for contributions and gains until retirement.
Taxable Accounts: Accounts from banks and brokerages are made up of after-tax dollars. You’ll pay capital gains taxes on investment profits, but you may be able to offset gains if you sell an investment for a loss.
Health Savings Accounts (HSAs): Though HSAs are not retirement accounts, they do offer a number of benefits, including:
● Tax-free investment growth
● Reduction of taxable income
● Tax-free withdrawals for qualified medical costs.
Not sure which accounts would best suit your needs? A professional strategic planner can review your goals and help you design a personalized strategy that can enable you to reach your long-term targets.
Remember to take advantage of any employer match by contributing the max amount to your company’s retirement plan. Another best practice is to automate your retirement savings by directing a portion of your paycheck to your retirement account.
It all starts with a plan. The earlier you start the better but even if you are close to retirement, it is not too late to start creating benefits for yourself in the future.