Proper tax planning enhances your financial security throughout retirement.
Taxes can significantly affect your retirement income, reducing the amount available for spending. Understanding how different income sources are taxed and implementing tax-efficient withdrawal strategies can help minimize tax burdens and maximize savings.
Taxable vs. Tax-Advantaged Income
Retirement income falls into three categories:
- Taxable Income: Withdrawals from traditional 401(k)s, IRAs, pensions, and some Social Security benefits are taxed as ordinary income.
- Tax-Free Income: Roth IRA and Roth 401(k) withdrawals (if held for at least five years and taken after age 59½) are tax-free.
- Partially Taxable Income: Social Security benefits may be partially taxed depending on overall income.
Required Minimum Distributions (RMDs)
Starting at age 73 (as of 2023), retirees must take RMDs from traditional IRAs and 401(k)s, which are subject to income tax. Failing to take RMDs results in a steep 25% penalty on the required withdrawal amount.
To mitigate RMD-related tax burdens, consider:
- Roth Conversions: Converting a portion of traditional accounts to Roth IRAs before RMDs begin to reduce future taxable income.
- Qualified Charitable Distributions (QCDs): Donating RMDs directly to charity to avoid taxation.
Tax-Efficient Withdrawal Strategies
A structured withdrawal plan can reduce tax liabilities:
- Withdraw from taxable accounts first to allow tax-advantaged accounts to continue growing.
- Tap traditional retirement accounts next to spread out taxable withdrawals over time.
- Use Roth accounts last, as withdrawals are tax-free.
State Taxes and Retirement
Some states tax Social Security benefits and retirement income, while others offer exemptions. Before relocating, consider the tax-friendliness of potential states.
Plan for a Secure Retirement
Proper tax planning ensures that more of your retirement savings are available for essential expenses, enhancing financial security throughout retirement.
Ethos Capital Advisors, LLC (“ECA”) is an independent financial services firm helping individuals create retirement strategies to custom suit their needs and objectives. Insurance products and services are offered, and sold, through individually licensed and appointed agents in all appropriate jurisdictions.
This content is provided for educational purposes only. Commentary should not be regarded as a complete analysis of the subjects discussed and should not be relied upon for entering into any transaction, advisory relationship, or making any investment decision. The information presented does not involve the rendering of personalized investment advice and should not be viewed as an offer to buy or sell any securities.
Articles were prepared by a third party and were distributed by Financial Media Exchange, which is not affiliated with ECA. Other organizations or persons may analyze investments and the approach to investing from a different perspective than that reflected in this article. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change.
Any tax information provided is general in should not be construed as legal or tax advice. Information is derived from sources deemed to be reliable. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time.
