So, you’ve done all the right things to prepare for retirement and now it’s time to ensure that the right tax strategies are in place to protect those assets you’ve worked so hard for.
While payouts from some retirement accounts, such as traditional IRAs, are taxable, you might be able to avoid that situation if you don’t make withdrawals until you reach age 72. However, that is the age when required minimum distributions begin from many of your investment accounts and along with them, your tax liability.
In an effort to limit your tax burden as much as possible, at a time when multiple factors are at play in a volatile economy, there are several worthwhile approaches to consider.
1. The Roth IRA- With this product, your funds and withdrawals are exempt from both required minimum distributions and your distributions are not taxed, as your contributions are from money you’ve already paid taxes on- known as “after-tax money.” Consider converting some of your 401(k) and traditional IRA into a Roth, then, as you near retirement, your Roth IRA will grow tax-free.
It’s important to note, too, that Roth IRAs can be useful for those who have financial flexibility with their taxes now, but for those with less ability to be financially flexible, Roth IRAs might not be the best option. It’s always advisable to check with your tax advisor before making any changes.
2. Partial In-Service Rollover – The contributions most people make toward their retirement are through payroll deductions for 401(k) plans. While they offer a set of limited investment options that work well while saving, you may want to consider a different approach for retirement tax planning. A partial in-service rollover can offer an opportunity to move some retirement money into a more tax-advantageous IRA, where there are more funds to choose from, as you continue working.
That being said, it’s also important to note that the rules for these types of rollovers can be complex and require significant paperwork that can impact access to your funds, delaying it for a defined amount of time.
3. Life Insurance – Permanent life insurance policies can be useful as a retirement resource, as you can, under certain circumstances, withdraw money from the policy, or borrow against it, particularly in the event of unforeseen health care concerns.
Today, there are variable, universal, whole life and hybrid life insurances policies. The hybrid product is one to consider, as the benefits it provides for long term care can be significantly higher than the death benefit.
Again, these policies come with their own concerns, including high premiums and restrictions on accessing your money, as well as penalties to withdraw and transfer funds.
4. Fixed-Index Annuities – Annuities are an insurance product you buy to guarantee a retirement income, often considered a replacement for bonds. With a fixed-income annuity, the funds you invest in will determine the growth of your annuity income.
A certain level of income, adjusted to inflation, is guaranteed with a fixed-income annuity, regardless of how the markets perform. Additionally, these policies can provide long-term care provisions that can be of benefit.
As for tax benefits, the fixed-index annuity protects the money you invest on a tax-deferred basis. Once you start making withdrawals, the money derived from your initial investment is tax-exempt. The earnings are then taxed at your income tax rate.
There are downsides to these products, too. They are complicated, expensive and can make it challenging to access your money in the event of unplanned expenses.
The best thing you can do is to take your time and investigate the various options. Our tax experts can answer questions and address your concerns about the best tax strategies for your retirement dollars. Please schedule an appointment with one of our tax advisors today.