When it comes to retirement planning, we typically tally up our daily expenses – housing, transportation, utilities, food, insurance, healthcare, entertainment – and budget accordingly for enough income to cover those wants and needs. But we may not factor in an annual expense we can’t avoid: taxes. One reason may be that our complex tax code treats various sources of retirement income differently, so it can be hard to estimate what you’ll have after taxes using back of-the-envelope calculations.
Often overlooked is the fact that income withdrawals from your traditional 401(k)s, pension plans, qualified annuities and individual retirement accounts – and even some of your Social Security benefits – could be subject to federal taxes. For example, your $500,000 401(k) may only be worth $375,000 after 25% taxes. Since your federal tax bracket will likely be the highest tax you’ll face in retirement, it just makes sense to go over your own numbers with your accountant and financial advisor to maximize income and reduce taxes. Note that your modified adjusted gross income affects your Medicare premiums. In some cases, just an extra $1 of income could cost you hundreds or even thousands more in Medicare payments – another reason it pays to explore tax-saving strategies in retirement.
A Few Ideas
Here are a few suggestions. Be sure to talk to your professional advisors about these and other tax-saving strategies.
Asset allocation and diversification do not guarantee a profit nor protect against loss. Withdrawals from qualified accounts may be subject to income taxes, and prior to age 59½ a 10% federal penalty tax may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.
Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Raymond James advisors do not render tax advise. You should discuss any tax matters with your appropriate tax professional.