Tax Planning Strategies for Retirees

While it’s impossible to entirely avoid taxation on your income, anticipating these tax burdens can help you minimize income taxes in your retirement. Below is a highlight of investment and withdrawal strategies that form the basis for tax planning for retirees.

Investment strategies

The saying “don’t put all your eggs in one basket” is a metaphor for diversification because, with several variables, you have multiple outcomes and options, hence a higher chance of survival. Different types of investments receive different tax treatments, and these should be considered when saving/investing for retirement.

For example, investing in both tax deductible and tax deferred IRAs provides you with two options of realizing your tax obligations with much flexibility. The traditional IRA gives you an option for paying taxes only during the mandatory periodic withdrawals in the form of Required Minimal Distributions (MRDs). The Roth IRA allows tax-free withdrawals and once qualified, there are no MRDs.

Incorporating 401(k) and other capital markets investments in your investment portfolio gives you the opportunity to access your money at a lower tax rate, and only charged to the gains from the capital. Long-term capital gains are taxed at around 15% or below. On the other hand, withdrawals from traditional retirement accounts attract ordinary income tax rates that range from 10% to 40%.

Withdrawal strategies

Tax liabilities for retirees are triggered by withdrawal from the investment/retirement accounts. Suffice to say your withdrawals and distributions patterns determine how much you pay the taxman. Two retirees with the same products and equal money in their investment portfolios are most likely to have different tax obligations based on their withdrawal and distributions. With a diversified investment portfolio, your withdrawal strategies should take full advantage of the preferential accounts to ensure low tax obligations while you maximize your assets and earnings.

The first option is to trigger taxable income to avoid climbing to a higher tax bracket and to avoid tax penalties. It entails taking qualified withdrawals from your MRDs and meeting your expenses from your taxable account.

The second option is to withdraw from tax deferred accounts to delay that tax obligation. This strategy also includes rolling over your 401(k) to your IRA to avoid paying capital gains tax from selling stock and exploiting the net unrealized appreciation. Using your taxable and tax-deferred accounts for your expenses shields you from liquidating your assets and limiting your future returns.

Lastly, before taking money from retirement accounts (traditional and Roth), make sure they qualify and you will avoid incurring taxes and other penalties.

A comprehensive tax planning strategy can significantly lower your tax obligations in your retirement. The strategy entails identifying your expected living expenses, gross income, and sources of revenue during your retirement. As a retiree, set up you investment accounts in a diversified manner to ensure optimum tax benefits. A diversified portfolio also provides several opportunities for minimization of tax obligations through making informed withdrawals.

However, despite tax planning strategies, the starting point for minimizing income tax for retirees is to reduce expenses that trigger unnecessary withdrawals.

To learn and understand more about tax planning strategies for retirees, register for a free workshop event near you.


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