Tax Planning Strategies for Retirement

You’ve likely put aside money toward retirement to supplement social security and help ensure financial stability when you leave the workforce. Yet, have you thought about how your tax situation can impact your funds? To make the most of your retirement income stream, you’ll need a solid understanding of how all your assets work together and the tax implications of each.

How to Plan for Taxes in Retirement

Develop a successful retirement tax planning strategy by starting with the fundamentals.

Know Your Tax Bracket

Retirement savings generally fall into two categories — tax-deferred and after-tax. Under a tax-deferred account, such as a traditional IRA or employer-sponsored plan, you’ll pay taxes at your current bracket once you begin withdrawals. After-tax accounts, like Roth IRAs and regular savings, represent dollars you’ve already paid taxes on.

Younger workers may find themselves in lower brackets, like 10 or 12%, before transitioning into the 22 or 24% brackets as their earnings increase. High-wage earners can pay as much as 32 to 37% in taxes. 

Each of these scenarios calls for different retirement tax strategies, so it’s best to seek expert advice for your unique situation.

Diversify Your Account Types

For many, future tax brackets may differ from current ones, calling for diversifying among different account types for maximum withdrawal flexibility.

With a mix of pre- and post-tax assets, you and your tax advisor can create a plan with more control over your taxable income in retirement.

Know the Social Security Rules

While social security can provide an income stream as early as age 62, that may not be the best time for you to start collecting it. Opting for an earlier election can permanently reduce your expected monthly benefit. 

Social security benefits may be subject to taxation for those with significant income or plans to work after reaching full retirement age.

Marital status, such as divorce and widowhood, can also affect the ideal timing, so it’s best to consult with a financial professional for advice specific to your situation.

Use Your Retirement Assets Wisely

Under the current IRS rules, you must begin withdrawing traditional tax-deferred assets once you reach age 72. The amount you take — called your required minimum distribution (RMD) — changes each year and is a portion of the overall value of your IRA. 

Roth IRAs and Roth-based employer-sponsored plans have no RMDs, and withdrawals are tax-free once you meet the eligibility criteria.

Work with a retirement tax professional to develop a withdrawal strategy combining assets from both account types to help keep your income in the lower tax brackets.

Consider a Roth Conversion

With their tax-free withdrawals and no RMDs, Roth IRAs can be a powerful way to maximize savings and add diversity to a mostly pre-tax retirement portfolio. Many traditional IRA owners can convert all or a portion of their tax-deferred savings into a Roth account and pay taxes on the value at the same rate as ordinary income.

Consult with a tax-planning specialist to ensure a conversion doesn’t unexpectedly push you into a higher tax bracket.

Get Retirement Tax Advice You Can Trust

Marshall Jones has served tax planning and preparation needs in Atlanta for over 30 years, operating with a dedication to service, quality and integrity. We offer a full suite of services for individuals and companies across numerous industries.

Contact us online for more information or to request an appointment.

Retirement tax advice