Tax Planning

Upon retirement, your income can come from contributions to your IRA accounts, savings, investment funds, or Social Security benefits. Regardless of your income level, it is only prudent to take certain tax planning strategies to reduce taxation on your retirement benefits. Tax planning for retirement allows retirees to enjoy their money in their prime years. Below is an expert guide on tax planning strategies for retirement.

Tax Planning Strategies

A successful tax planning strategy should center around a few major themes, including;

  • Using the lower available tax rates
  • Increasing deductions
  • Reducing incomes

Long-term tax planning is an ideal way to increase your income during retirement. It is essential to consider your tax planning as rather tax saving. Below are tax planning strategies you can implement to help you safeguard yourself for a tax-free retirement.

1. Roth IRA Conversion

Roth IRAs differ from traditional IRAs. Roth IRAs are a unique type of IRAs typically funded by after-tax dollars during your employment tenure. Unlike traditional IRAs, Roth IRAs are RMD exempted. As such, you won't need to pay taxes on distributions you take during your retirement. Roth IRAs allow you to enjoy a tax-free retirement.

Additionally, you will pay taxes on the pertinent retirement account in advance by converting part of your traditional IRA or 401(k) into a Roth IRA. Subsequently, you are left with more to use when you need it. Moreover, your assets grow tax-free, and you will withdraw tax-free and penalty-free withdrawals.

2. Moving to A Tax-friendly State

Living in a tax-friendly state is one of the most practical tax-saving and planning strategies. Currently, 7-8 states don't have taxable income, including Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska. Tennessee is expected to join this list.

Federal law hinders states from taxing residents on retirement benefits earned from different states. In addition, some states have special breaks from taxable income or lower income taxes. Some don't have tax on part or whole of IRAs income or income from retirement plans.

3. Fixed-index Annuities

You can ensure you don't run out of retirement income by considering an investment in fixed-index annuities. In a fixed index annuity, an investor's principal grows based on how they allocate money to market indexes. They also come with a certain protection level against loss. Additionally, annuities offer crucial tax benefits in retirement. Your money will grow on a tax-deferred basis.

Consult A Financial Consultant

However, before implementing any retirement tax strategies, ensure you consult an expert financial advisor to help you. Below are the benefits of allowing our financial advisors to help you with your tax planning strategies:

More Impact on Your Taxes
A financial advisor sees more of the financial picture, unlike your accountant. As such, they can access many levers that often have tax implications, including advice on annuities, funding your retirement account, and investments.

Avoiding Costly Mistakes
Hiring a financial advisor helps you to avoid costly tax mistakes that can wipe decades of investment returns.

Lacking Tax-Efficiency Hinders Your Growth
Tax-efficient individuals can keep their taxes low and typically have more funds to spend or invest in alternate priorities, unlike the less tax-focused individuals. A financial advisor can help you accumulate wealth.

A well-trained and experienced tax advisor can help you with your tax planning during retirement. In addition, they can guide you through the Roth IRA conversion processes, hence helping you in avoiding taxes on IRA withdrawals.

Bottom Line

Are you stuck at implementing key tax planning strategies for retirement? Contact our expert tax advisors to help you ensure efficiency and increase your income in your retirement.

Frequently Asked Questions:

How Can Retirees Save on Taxes?
Ways to reduce taxes during retirement include:

  • Know what is taxable
  • Know your respective tax bracket
  • Consider Roth IRA conversion
  • Tax diversification
  • Consider moving to tax-friendly states.

Should I Use a Roth IRA or Traditional IRA?
Roth IRA is an improved version of traditional IRAs. Roths allow flexibility and will help you avoid extreme taxes on retirement. Most traditional IRA owners are currently converting to Roth IRAs.

What is A Deferred Annuity?
This is an insurance contract that generates additional income important to retirees. It is designed for the long term.

Do I Pay Taxes on My Retirement Income?
Yes, you are required to submit income tax on your retirement income (pension). You may also have to pay income tax on any tax-deferred investments, such as 401 (k).

What is a TFRA Retirement Account?
A tax-free retirement account (TFRA) is a retirement savings plan that almost functions like Roth IRAs. The program allows you to save for retirement in a way that is beneficial to your financial needs. Ideally, you pay taxes on the funds that go into the account. However, the growth on your funds is untaxed.

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