Tax time is here again. If you’re recently retired, you may be surprised to learn that taxes still play a big role in retirement. Many retirees assume that because they are no longer earning income, taxes won’t be a major expense.
The truth, though, is that taxes are often a significant expense for retirees. Many common sources of retirement income are taxable. Social Security is taxable, as are distributions from traditional IRAs, 401(k) plans and other qualified plans. Pension benefits usually are also taxable.
If you don’t plan ahead, you could find that taxes take a big bite out of your retirement budget. You may have less spendable income than you’d expected, and that could limit your ability to enjoy retirement.
Fortunately, there are steps you can take to minimize your tax exposure. Below are a few tips to consider as part of your retirement strategy:
Convert your traditional IRA to a Roth.
Distributions from traditional IRAs and 401(k) plans are taxable. This is because most traditional IRAs are funded with untaxed dollars. You may receive a tax deduction for your contributions. Your funds then grow on a tax-deferred basis inside the account. The IRS collects taxes on those funds when you take a withdrawal. That could be problematic in retirement if you’re relying heavily on IRA or 401(k) assets.
One possible option is to convert your traditional IRA funds into a Roth. You pay taxes on the converted amount. Once the funds are in the Roth, however, you won’t pay taxes on growth or distributions. It may create a tax liability today, but it could also eliminate tax exposure in the future.
Maximize your use of a health savings account (HSA).
You’ll likely face a broad range of out-of-pocket health care costs in retirement. Fidelity estimates that the average retired couple is likely to pay $275,000 for health care expenses in retirement.1 That includes things like premiums, deductibles, copays and more.
However, you can use a health savings account (HSA) to pay for those expenses with tax-free distributions. With an HSA, you can make tax-deductible contributions, grow your funds tax-deferred and then take tax-free distributions to pay for qualified health care expenses. Using the HSA for your health care costs could reduce the amount you need to take from your IRA, thus reducing your taxable income.
Transfer your RMDs to charity.
Traditional IRAs and 401(k) plans are popular in part because they allow you to defer your taxes on investment growth. However, you can’t defer those taxes forever. The IRS requires you to take minimum distributions at age 70½. These required minimum distributions (RMDs) are treated as taxable income.
If you’d already planned on giving money to charity, however, you could take advantage of a unique exception to reduce your taxable income. The IRS allows you to donate your RMDs to charity and avoid paying taxes on the distribution. To do so, you’ll have to set up the distribution to transfer directly to the charity without passing through your account first.
Ready to develop your retirement tax strategy? Let’s talk about it. Contact us at Carstens Financial Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
17377 - 2018/2/13
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