It’s important to remember that your tax obligations do not end after your retirement. In fact, tax obligations far outlive your working life and directly impact the stability and security of your retirement. Without proper planning, taxes can cut into your available retirement income and leave you with less to live on than anticipated.
Smart retirement tax strategies can help minimize your taxes during your retirement years, but you have to lay the groundwork in the years before your retirement. By providing reliable guidance on tax planning and compliance related to your retirement funds, our tax professional at Waters Hardy can help you establish a solid foundation. Our team provides complete tax preparation services and customize each situation for your retirement needs. It begins with understanding the rules for how your sources of retirement income will be taxed.
Start with a Tax Plan
- Long-range tax planning
Long-range tax planning provides a big-picture overview of your tax goals from year to year. Having a long-range tax strategy in place will guide the decisions you make about how much you should withdraw from different accounts from year to year. Also, you need to know how to coordinate your sources of income with your Social Security benefits to deliver more after-tax income.
- Annual tax planning
Annual tax planning involves assessing your tax plan throughout the year. An annual tax strategy includes addressing how tax rates and deductions can change each year. For example, uncovering some tax planning opportunities in the fall can positively impact your tax savings as early as spring.
5 Things You Can Do Now to Minimize Taxes on Your Retirement Savings
1. Contribute to 401(k), Roth 401(k), IRA, or Roth IRA
- 401(k)
With a 401(k)-retirement savings plan, you defer paying income tax until you withdraw the money from the account. You can defer taxes up to $20,500. You will get an immediate tax break because less money will be withheld for income taxes if the contributions are made via payroll deduction.
- Roth 401(k)
The contribution limits are the same, but the tax treatment is different. You don’t get an immediate tax break on your contributions. However, you can contribute after-tax dollars and accumulate tax-free withdrawals after age 59 ½ from an account at least five years old. You can withdraw the balance tax-free in retirement because the investment earnings within the account are not taxed each year.
- IRA
With this strategy, you can put off paying income tax up to $6,000. IRA tax deductions are phased out for 401(k) participants who earn between $68,000 and $78,000 individually and $109,000 and $129,000 for couples. The tax break is phased out if the couple’s income is $204,000 to $214,000 if only one spouse has access to a 401(k) plan at work.
- Roth IRA
Up to $6,000 can be prepaid on income tax using a Roth IRA. You can qualify for tax-free investment growth and tax-free withdrawals in retirement by contributing to a Roth IRA for at least five years. Roth IRA contributions are phased out if your adjusted gross income in between $129,000 and $144,00 as an individual and $204,000 to $214,000 as a married couple. People who earn more may still be eligible to convert traditional retirement account assets to a Roth.
Avoid Early Withdrawals
- IRA and 401(k)
There is a 10% tax penalty with withdrawals made before age 59 ½ for IRAs and age 55 for 401(k)s.
- Working Past Age 70
If you’re still working into your 70s or later and don’t own 5% or more of the company sponsoring the retirement plan, some 401(k) plans will allow you to delay withdrawals until you retire.
After age 72, to avoid the 50% tax penalty, you are still required to take minimum distributions from IRAs and 401(k) accounts associated with previous jobs.
2. Make Catch-up Contributions
Catch-up contributions to retirement accounts can provide an additional tax break for workers age 50 and older. Older workers can also defer taxes on an additional $6,500 in a 401(k) plan for a total tax-deductible contribution of as much as $27,000. IRA catch-up contributions up to $1,000 are allowed for those 50 years old and older. Moreover, older workers can make as much as a $7,000 tax-deductible IRA contribution.
3. Take Advantage of the Saver’s Credit
Retirement savers who contribute to a 401(k) or IRA are eligible for a saver’s credit if they earn up to $34,000 for individuals, $51,000 for heads of household, and $68,000 for married couples. However, you can claim this on your retirement account contributions of up to $2,000 ($4,000 for couples) and is worth between 10% and 50% of the amount contributed, with bigger credits going to lower-income savers. You can claim this credit in addition to the tax deduction for a traditional retirement account.
4. Take Required Minimum Distributions
IRAs and most 401(k)s require withdrawals after age 72, with income tax due on each traditional retirement account distribution. However, failing to withdraw the correct amount results in a penalty of 50% of the amount that should have been distributed, in addition to the income tax due. Your first required minimum distribution is due April 1st or after your turn seventy-two years old. After that, all distributions must be taken by December 31st to avoid the penalty.
5. Time Retirement Account Withdrawals
You will have some flexibility in the timing of your retirement account withdrawals and the resulting income tax bill. By spacing out your withdrawals, you can control your tax rate to ensure you stay in a lower tax bracket and avoid a big income tax bill in a year. You don’t have to take distributions yearly and can take penalty-free withdrawals in your 60s. You can minimize taxes on your retirement savings by taking retirement account distributions in a low-earning year.
Retirement Savings Starts with Waters Hardy
A successful retirement tax plan without professional assistance can be difficult. Finding a team of experts who specialize in tax planning and compliance is essential. The team at Waters Hardy has vast experience in providing tax preparation services including retirement planning. Learn more about how we can get started identifying tax-planning opportunities that will save you money in retirement.
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