Taxes can be one of your largest expenses during retirement, but with the right strategies, you can minimize their effect on your hard-earned savings.
Here’s a quick reminder of the Do’s and Don’ts that can help you manage taxes effectively:
DO: Know How Different Types of Income Are Taxed
- Roth IRAs are tax-free.
- Traditional IRAs and retirement accounts are taxable at ordinary income rates.
- Up to 85% of Social Security benefits can be taxed at ordinary income rates.
- The tax authorities tax long-term investment gains and dividends at capital gains rates and may subject them to a 3.8% net investment income tax at higher income levels.
DON’T: Limit Yourself to One Kind of Retirement Account
- Having multiple types of accounts creates tax flexibility and helps reduce overall tax liabilities.
DO: Let Tax-Advantaged Accounts Keep Growing
- But be cautious—if they grow too large, your required minimum distributions (RMDs) could create large tax liabilities, along with surcharges like IRMAA and the net investment income tax.
DON’T: Make Moves That Could Push You into a Higher Tax Bracket
- Plan ahead for major expenses, home renovations, or large purchases. Use a mix of taxable and after-tax accounts to straddle tax years or utilize tax-free accounts like HSAs.
DO: Look Ahead to When You’ll Turn 73
- Required minimum distributions (RMDs) can be a tax burden if they’re large enough to push you into a higher bracket. Start planning withdrawals earlier to spread out taxable income.
DON’T: Overlook the Length of Time You’ve Owned an Investment
- Selling investments held for one year or less can lead to higher taxes, as short-term capital gains don’t qualify for the lower long-term rates.
DO: Review Your Tax Situation When Life Changes Occur
- Major events like working past retirement age, relocating to a more retirement-friendly state, or dealing with health care costs should prompt a review of your tax situation.
If you’d like to explore these strategies or discuss how they apply to your situation, feel free to reach out to us here. We’re here to help you create a tax-efficient retirement plan.