For most of your working life, you’ve been in income-earning mode. You’ve had two choices- spend or save your earnings. Once you retire, you most likely will find yourself in spending mode more than ever before. With this spending comes tax implications that are different from those of working income tax regulations.
Tax planning for retirement requires you to look at your taxes in a different way. This will mostly likely mean new learning, new perspective, and new planning, which can be really intimidating for most people. Fear not. You’ve tapped into an amazing tax planning resource.
Waters Hardy is built on a superior reputation for tax planning and compliance. We are here to guide you through the best retirement plan possible. We will figure out one that analyzes your needs and creates a customized strategy to build and protect your retirement savings.
Retirement Security Over the Years
Every generation will face the burden of planning for retirement. In past years, American workers didn’t view retirement as something they had to “plan” for because they could securely depend on a pension plan that could support them throughout their lifetime. In recent years, the benefits that were once thought to be stable have declined significantly. Which results to many Americans independently planning to save and invest for their livelihood in their retirement years.
Workers become familiar with income taxes throughout the life of their careers, but many workers don’t realize they will continue to pay taxes in their retirement years. A recent survey conducted by Nationwide found that 42% of retirees did not know the impact taxes would have on their retirement income.
To maximize the benefits of retirement, it’s necessary to plan for these anticipated future taxes from the day you begin your working career. Aside from simply saving for retirement, there are certain tax strategies that you can use to minimize what you must pay the IRS during retirement, leaving more benefits for you to enjoy during retirement.
Tips for Retirement Tax Planning
Post-retirement taxes with costly fees can be unexpected and catch you off guard when you see them cutting into your retirement savings. With effective tax prep and planning, this can be avoided. The time to plan is now, don’t wait until you retire.
1. Plan Your Withdrawal Strategy
Carefully decide how to tap your taxable, tax-deferred, and tax-free assets. Evaluate which to tap first, what amounts to withdraw, and when to withdraw them. An amount as small as $1,000, taken from the wrong account at the wrong time, could increase your taxes substantially.
2. Time Your Social Security Benefits
At age 62, Social Security retirement benefits begin being dispersed to you at a rate of about 70% of your full benefit. If you chose to wait until full retirement age, which varies between 65-67, depending on the year you were born, you will receive 100% of your benefit. Every year that you wait beyond 62 your benefit increases by 8% until 70. That increased income could really add up. Delaying retirement for just one year could save a lot of money.
3. Convert Assets to a Roth IRA
This can be a great way to balance out your tax burden over the years. Just be smart and careful of how much you convert. As a result, rather than reducing your lifetime tax cost by following a long-term strategy, you may end up paying higher taxes now.
4. Consider Where You Will Retire
It’s not uncommon for people to pack up and move after retirement. They may be looking for a change in scenery or a move closer to grandkids. However, did you know that some people relocate solely based on their consideration of states with lower or nonexistent income taxes?
- Nine states with NO income taxes: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, New Hampshire, Wyoming and Washington
- New Hampshire and Tennessee tax only interest and dividends.
5. Manage Your Income Tax Bracket
Your tax bracket can change based on distributions in retirement and increase the amount of taxes owed. Money from a pension, social security, savings accounts, and investments can bump a person into a higher tax bracket than expected.
You can decide which accounts to save in and carefully take money from retirement funds to avoid unexpected changes to your tax bracket. You will benefit from working through this tax planning with the help of professional accounting services or tax advisors.
Saving for Retirement
Start Early
- Aim to save as much as you can now. Interest compounds, as your assets generate earnings, they are reinvested to generate more earnings. Starting as soon as possible can really work in your favor.
Automation
- Make your contributions automatic each month and you most likely will not ever notice or miss it this income. This is a great way to potentially grow your savings without ever thinking about it.
Evaluate Spending
- Be smart about spending. What you see now as necessary spending most likely won’t seem so necessary in retrospect. Revisit your budget and eliminate and minimize spending where you can.
Plan and Execute
- Have a concrete plan and goals. If you know how much you’ll need to save and invest, it’s easier to achieve and celebrate benchmarks. Additionally, knowing at what age you may be able to retire is a goal that can motivate anyone.
Use Extra Funds
- Any extra money earned, such as a bonus or raise, for example, should go directly into your retirement. Increase your contribution or put half of it into your plan no matter how tempting it may be to spend it right away.
Secure Your Retirement with Waters Hardy
Some retirement factors will ultimately be beyond your control. However, when it comes to your taxes, this is one area you can control by thinking a few steps ahead. Smart planning can help you save money and improve your financial security by lowering costs and increasing savings.
At Waters Hardy, we understand that your personal situation is unique, and a tax strategy needs to be customized.
Talk with the trusted, professional, and reliable team at Waters Hardy today. We can start advising and putting together a comprehensive and personalized retirement plan for you. It’s never too late to start planning what is best for your financial future. Contact us today.
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