Getting married or divorced, welcoming a new baby, sending a child off to college, changing jobs, or retiring have major tax implications. While some of these circumstances result in credits or deductions, others can bring unwanted surprises. Understanding how taxes impact your financial and investment decisions no matter your age is critical to helping you stay on track toward your goals. Tax planning is a core component of the customized financial roadmaps we create for our clients that encompasses more than just tax season.
Tax-Deferred & Tax-Free Accounts
How you allocate your assets across taxable, tax-deferred or tax-free accounts determines how much money you keep and how much goes to Uncle Sam. Using the most tax-efficient strategies when you begin taking distributions from your accounts can help avoid unnecessary taxation and keep more money in your pocket over time. We can’t predict future tax rates, but we can plan for taxes and possibly reduce our overall tax burden. Contributing to a 401(k) or traditional IRA allows for immediate tax benefits. You can deduct your contributions in the year you make them, thus lowering your taxable income for the year. Contributions and earnings in these accounts grow tax-free until you withdraw the money later in life, which could be another benefit if you find yourself in a lower income tax bracket in retirement.
When you make contributions to a Roth IRA, there are no tax deductions. However, when you need to withdraw that money in retirement, it comes out tax-free. Keep in mind that you'll need to wait until age 59 ½ or for the Roth IRA to be at least five years old before you can withdraw any earnings penalty-free and tax-free. A Roth IRA has other benefits, including tax-free growth on investments, and those who are 50 and older can contribute even more money to this type of account. Contributions can also be made at any age as long as you have earned income and there are no required minimum distributions on a Roth IRA.
A different way to lower your overall tax liability is by convert ordinary income into long-term capital gains, which are taxed at a more favorable rate. Other tax strategies to consider include tax-loss harvesting, gifting to loved ones or charitable organizations, or using out-of-pocket medical expenses.
Taxes in Retirement
Most people will have income drawn from a variety of sources in retirement, some of which are taxed more heavily than others. You’ll want to know the difference when estimating how much money you’ll need in retirement. We specialize in creating tax-efficient withdrawal strategies to help you keep more of your money. If you don’t plan to spend it all during retirement, an estate planner can share strategies to minimize the tax burden for your family.
It’s also important to have a strategy for taking Social Security. If you plan on working in retirement and your income exceeds certain limits, your benefits may be taxed. A financial professional can help determine Social Security strategies based on your situation and structure your income sources in the most tax-efficient manner.
There’s no secret formula when it comes to tax planning. Your age, income levels, time horizon and other factors highlight the need to have a custom roadmap tailored for you. A good rule of thumb is to preserve tax-deferred investments for as long as possible. This allows you to take advantage of low-capital gains while investments in your retirement accounts continue to grow.
Whether you’re retired or preparing for retirement, we can help you take advantage of tax strategies that align with your specific goals. Schedule a meeting with us to discuss the best approach for your financial situation.
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For a comprehensive review of your personal situation, always consult with a tax or legal
Advisor. Neither Cetera Investment Services, nor any of its representatives may give legal or tax advice.