Broker Check

Retirement Tax Planning

Your Guide to Retirement Tax Planning

Most people don’t think about how taxes affect their retirement income until it’s too late. Taxes affect your net income now and during retirement. Fortunately, you can minimize your tax burden by engaging in retirement tax planning before and during your retirement. Our financial advisors can help create a retirement plan for you that considers your tax burden and maximizes your net earnings.

Your Investment Options

It’s important to understand your investment options. Most people have traditional retirement accounts, such as 401(k)s or 403(b)s, but there are other options to save for retirement. Besides tax-deferred accounts, you can use Roth accounts and taxable investment accounts to build a sizable nest egg for your future.

Tax-Deferred Accounts

Tax-deferred accounts, such as your traditional 401(k) or IRA, allow you to reduce your current tax burden. When you add money to your retirement account, you reduce your taxable income for the current year. But you have to pay income taxes when it’s time to withdraw those retirement benefits. If you’re in a high-income tax bracket, this is usually a smart option. Tax-deferred accounts also have very high contribution limits.

Roth Accounts

Roth accounts, such as Roth 401(k)s and Roth IRAs, let you contribute after-tax dollars to your retirement savings. While Roth contributions don’t reduce your taxable income for the current year, the Roth distributions during retirement are tax free. Roth distributions can subsidize your income during retirement without adding to your tax burden. If you’re in a low tax bracket, setting up a Roth account can be beneficial for your tax planning.

Taxable Accounts

Any other investment accounts outside of a retirement plan are taxable accounts. You have to pay taxes on your earnings, but you keep sole control over when you receive distributions. If you plan to retire early, you can use these taxable investment accounts to provide an income for you until you can withdraw from your other retirement accounts or apply for Social Security benefits. 

How to Maximize Your Tax Savings

We can help you maximize your tax savings in retirement. Which strategy you adopt depends on your current taxable income. If you’re in a lower tax bracket, we recommend setting up Roth retirement accounts and maxing out those contributions. Using after-tax money won’t reduce your taxes, but they’re more manageable in a lower tax bracket.

If you’re in one of the middle tax brackets, you can benefit from using both Roth and deferred retirement accounts. That gives you the option to reduce your tax burden now and receive tax-free income in retirement. If you’re a high-wage earner, you need the deductions a deferred retirement plan offers. Your tax bracket will probably be lower in retirement. You can still subsidize those retirement savings with Roth accounts, too.

FAQs about Retirement Tax Planning

How Can I Save Taxes in Retirement?

We can help you create a retirement income distribution plan that minimizes your tax burden and maximizes your net earnings. You want to be strategic about which accounts you withdraw from to avoid slipping into a higher tax bracket. You can use Roth accounts or private investment accounts to subsidize your taxable earnings. 

When Should I Start Tax Planning for My Retirement?

It’s a good idea to think about the tax implications of your retirement accounts while you’re still actively contributing. This gives you the opportunity to shift the focus from a traditional to a Roth account, or vice versa. We can help you analyze your tax situation and make recommendations for your situation. 

Is It a Good Idea to Convert My 401(k) into a Roth Account?

It might be. Converting your 401(k) into a Roth account will cause higher taxes for the current year, but it will provide you with tax-free income during retirement. It’s not the right choice for everyone, and there are pros and cons to a Roth conversion. Our financial advisors will be happy to help you make the best decision for your future. 

Let Us Help You with Retirement Tax Planning

Proper tax planning can make a positive difference for your retirement. We want to focus on how taxes affect your income in retirement without losing sight of your current taxable income. Depending on your tax bracket, you want to invest in a mixture of tax-deferred, Roth, and taxable investment accounts. Call us today to schedule a consultation and create your tax plan for retirement. 

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.

Have a Question?

Thank you!