Retirement is typically heralded as a time of financial freedom and relaxation. But for many retirees, taxes can bring an element of unwelcome complexity to an otherwise tranquil lifestyle. While you may no longer be earning a paycheck, your carefully accumulated savings, investments, and even Social Security benefits can still be subject to taxation. That’s why tax-efficient retirement strategies are essential.
This article shines a light on the tactics that can help you mitigate your tax burden, maximize your withdrawals, and truly enjoy your golden years.
Understanding Tax-Advantaged Accounts: Pre-Tax vs. Post-Tax
Let’s start by exploring the different types of retirement accounts and their tax implications.
Traditional IRAs and 401(k)s (pre-tax): Contributions to these accounts are usually made with pre-tax dollars, meaning they reduce your taxable income in the year of contribution. Your money grows tax-deferred, and you don’t pay taxes until you withdraw funds in retirement.
Roth IRAs and Roth 401(k)s (post-tax): Contributions to Roth accounts are made with after-tax dollars, meaning you don’t get an up-front tax deduction. However, the significant gain here is that your qualified withdrawals in retirement are entirely tax-free.
Health savings accounts (HSAs): Often called the “triple-tax advantage” account, an HSA offers unique tax perks when paired with a high-deductible health plan (HDHP). Contributions are tax-deductible (or pre-tax if made through payroll), the money grows tax-free, and qualified withdrawals for medical expenses are also tax-free.
Strategic Withdrawal Order and Tax Bracketing
Once you’re in retirement, how you withdraw your money can significantly impact your tax bill.
Tax brackets: A common approach is to strategically withdraw from different account types to keep your taxable income within lower tax brackets. For example, if you have a year with lower income, consider taking more from traditional pre-tax accounts to “fill up” lower tax brackets before higher-taxed income sources kick in.
Roth conversions: A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA. You pay taxes on the converted amount in the year of conversion, but all future qualified withdrawals from the Roth account are tax-free. This strategy is most effective during years when you anticipate being in a lower tax bracket.
Delaying Social Security: Delaying Social Security benefits past your full retirement age (up to age 70) can provide an increased income stream later in life. This can reduce the need to draw as heavily from taxable retirement accounts in your early retirement years, potentially keeping your taxable income lower and deferring taxes.
Managing Investments for Tax Efficiency
Beyond the account types, the way you manage your investments within these accounts is another essential tax-efficient retirement strategy.
Asset location: This strategy involves placing different types of investments in different account types based on their tax characteristics. For instance, greatly taxed investments (like actively traded funds, REITs, or bonds that generate ordinary income) are often better placed in tax-advantaged accounts (like 401(k)s or IRAs) to shield their income from annual taxation.
Tax-loss harvesting: In taxable brokerage accounts, if you have investments that have lost value, you can sell them to realize a capital loss. This loss can then be used to offset capital gains.
Qualified charitable distributions (QCDs): If you are 70½ or older, you can make a QCD directly from your IRA to a qualified charity. This distribution counts toward your RMD but is not included in your gross income, thus reducing your taxable income. This is a powerful tax-efficient retirement strategy for giving back while simultaneously lowering your tax burden.
Partner With a Professional for Tax-Efficient Retirement Planning
As discussed above, there are tax-efficient retirement strategies you can leverage to mitigate your tax burden in retirement. As with most tax-related matters however, several complex considerations must be taken into account.
But you don’t have to go through this process alone. To feel confident about your retirement plan, you can work with a professional financial advisor to help you sort through the complexities.
At Premier Planning Group, we take pride in our work with the intention of taking care of the Annapolis community.
Take the first step toward your ideal retirement. Call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
Cetera Advisor Networks LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.