Valuable Tax Planning for a Blissful Retirement

What you need to know.

We all want to live in comfort and prosperity. It’s why we work so hard. In an ideal world, this effort, combined with thoughtful and strategic savings, should stead us well in retirement, and yet, there’s a subtle but significant oversight to this logic.

Retirement saving is far more complicated than squirreling away money or even investing. It also needs to look at practical ways to protect your investments and any money that you save.

Many people overlook the fact that you still have to pay taxes during your retirement. If you have not adequately planned for your golden years, then much of your savings will go to Uncle Sam once you liquidate your investments.

Having 2 million dollars in retirement savings is excellent. But how much of that will you have to pay out in taxes? Have you anticipated this pay-out and its effects on your day-to-day retirement spending?

A proper retirement strategy is key to dealing with these unknowns. This strategy will combine traditional retirement planning with tactical tax planning to mitigate your tax burden during the years that you are not working.

This kind of strategy always include the following:

Estimating taxation on your traditional retirement savings plans.

It is important to remember that 401(k)s and IRAs are tax exempt only at times of your deposit. You are not saving taxes, but merely deferring on your taxes for a later date. If you anticipate being in a lower tax bracket during retirement, then these savings provide an advantage. But for higher-income earners, these savings plans need to be employed alongside other retirement saving tools, so that you can keep the money you’ve earned so you can enjoy the retirement that you want.

Understanding taxation on your Social Security benefits.

While the terms of taxation on Social Security vary from state to state, it’s essential to understand that these benefits are considered part of your combined income. Whatever money you receive from Social Security payments will be added to the income you receive from liquidated 401(k)s, traditional IRAs and other assets. The federal government will tax your combined income, and the state may too, depending on where you live. Anticipating this tax burden is essential to developing the right tax strategy for your retirement savings.

Anticipating possible RMD penalties.

Here’s an important fact: anyone aged 72 or over must make withdrawals from their 401(k)s or traditional IRAs. These Required minimum distributions (RMDs) prevent you from keeping your assets in savings forever and ensure that the government will get their tax cut, no matter what. RMDs have very high penalties — you will be taxed 50% on any designated distribution amount that you don’t withdraw on time. For example, if the RMD stipulates that you must withdraw $20,000 from your 401(k) and choose not to, then you will be taxed $10,000. Such a considerable penalty can have devastating effects on your retirement cash-flow and security. Creating a proper withdrawal schedule that includes this RMB reality is, therefore, essential.

Embracing the advantages of a Roth IRA

Roth IRAs are retirement savings plans where you pay taxes upfront when you make your initial contribution. Because you are paying before you save, you will not pay taxes when you make a withdrawal from your Roth, during retirement. The money in a Roth IRA is the money that you keep, which gives you a clear understanding of how much money you have to spend during your non-working years.

Roth IRAs are a savvy tool when trying to create a transparent and comprehensive retirement strategy. Utilizing the typical Roth or employing a backdoor Roth IRA within your overall planning will give you great clarity when it comes to knowing what money you will have and keep during your non-working years.

Retirement planning is complicated, but with the right tools, knowledge, and guidance, it doesn’t have to be hard. You know how to make money. Now it’s time to learn how to keep it. Talk to a CRNA financial advisor today and start planning for the retirement of your dreams.

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