When it comes to protecting your nest egg, investment choices play an important role. It takes more than just enrolling in a 401(k) plan to enjoy your golden years to the fullest. While this is a good start, it may not be enough to live the retirement lifestyle of your dreams. Having a retirement plan that is tax-efficient is important.
For most retirees, there are three main sources of income. Namely, Social Security Benefits, IRAs, and retirements plans. We’ve compiled a list of additional smart strategies in this article to help you diversify your investments. Further, optimize your retirement plan by maximizing deductions and credits while minimizing taxes, and secure a stress-free future income.
Consider living in a tax-friendly state
There are currently seven states in America with no income taxes. These states are prohibited by Federal law to tax residents on retirement benefits earned in another state. This alone is already a good reason to consider living or moving to Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, or Tennessee, which will also join the list this year.
Rollover assets to an Individual Retirement Account (IRA) through a partial in-service distribution
If you are older than 59½ and contribute to a 401(k) plan, then you can elect to take a cash in-service distribution and rollover to an IRA, while still employed. More than 70% of 401(k) plans allow this type of rollover.
Even though 401(k) plans are good at saving for retirement, they are not necessarily that advantageous in terms of tax efficiency. But if you consider a partial in-service rollover, you can move some of your retirement funds from your 401(k) into an IRA — with different funding options to choose from.
The only restriction is the complexity of in-service distribution, which involves a lot of paperwork and a full understanding of the complex taxation regulations. Professional support from a financial advisor or tax specialist, like the team here at Waters Hardy, is very useful when going for this strategy.
Avoid RMDs
Did you know there are some ways of escaping from the Required Minimum Distributions (RMDs) at age 72? Here are a few ways we help clients avoid RMD requirements.
Transfer IRA to IRS
The first way is by transferring funds from your traditional IRA to an IRS-approved public charity, with a $100,000 annual limit (for a single individual or for each one of the spouses, in the case of married couples).
Roth IRA
Another possibility is to convert your traditional IRA or some of your 401(k) into a Roth IRA, which is a special kind of retirement account funded with the after-tax money you make before retiring. It’s a potential tax-free savings plan because it allows the contributor to pay the taxes on that portion of the retirement account in advance. Roth IRAs are not subject to RMDs.
Deferred annuity
Finally, another good way of avoiding RMDs is by investing in a special deferred annuity. You can use up to $135,000 or no more than 25% of your account balance from your traditional IRA or the 401(k) to buy a qualified longevity annual contract (QLAC). A QLAC functions as longevity insurance or a long-term investment like a pension, ensuring the insurer an annual retirement income. This kind of deferred annuity is also exempt from RMDs.
Getting to a tax-efficient retirement plan
Achieving a tax-efficient retirement may require not only smart choices and strategies but also technical expertise to best navigate the American tax code to your advantage and help you best protect your nest egg.
Professional support in planning retirement can avoid serious mistakes and save you time, money, and effort. Waters Hardy has a highly qualified and passionate team prepared to help you with all financial circumstances and situations. Contact a tax specialist today and start planning a safe retirement.
Resources
Seven states in America with no income taxes
Required Minimum Distributions (RMDs)
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