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  • Writer's pictureThomas E Murtha, MBA, CPA

Can Retirement Planning Help you Pay Lower Taxes?

Retirement planning should start as early as possible in your career. The more you save in your younger years, the more time your money has to grow.

But what about the tax liabilities? This is something many people worry about.

Most people know the tax deductions you get when you contribute to a traditional 401K or IRA, but what happens when you retire? Are you on the hook for a large tax liability?

You can be, but here are some simple ways retirement planning can help keep your tax liabilities minimized.

Consider Roth Retirement Accounts

Roth account retirement contributions are made after-tax. You don’t get the tax deduction today, but if you wait until age 59 ½ or older, your contributions AND earnings are tax-free when you take a distribution, as long as the account is at least 5 years old.

This can help offset your total tax liability since you won’t owe taxes on any money that comes from a Roth account.

Let Traditional Retirement Funds Grow

If you have traditional retirement accounts, delay withdrawing from them as long as possible. You’ll pay taxes in your current tax bracket. If you’re like most seniors, your tax bracket will decrease as you age. By age 72, you must take Required Minimum Distributions so that you pay your fair share of tax, but if you’re in a lower tax bracket, you’ll pay less.

Diversify your Withdrawals

As you withdraw from your tax accounts, take from different ‘buckets. ’In other words, if you have Roth accounts and traditional accounts, take as much as you can from the Roth accounts, while still withdrawing from traditional accounts. You’ll pay taxes on your distributions from traditional accounts, but not as much as if you supplement with withdrawals from your ROTH account.

Watch your Social Security Income

The longer you can delay taking Social Security Income, the more you’ll earn. The full retirement age for Social Security is 70. If you can wait that long, you won’t pay taxes on the

income (because you won’t receive it yet), which may lower your tax bracket and subsequent taxes on withdrawals made from your retirement accounts.

When you do collect SSI, try keeping your AGI as low as possible to avoid taxation on your SSI. Depending on your income, you could be taxed on 0%, 50%, or 85% of your Social Security earnings. Strategically supplementing your income with Roth account withdrawals can keep your tax liabilities down.

Final Thoughts

Planning now for your tax liabilities in retirement is crucial. Think of your lifestyle, projected income, and how much you have saved to get you through your retirement years when planning retirement.

Just aiming for a goal (to have say $1 million) isn’t enough. If you’re taxed at the highest tax bracket on that $1 million, you’ll have a lot less money than you thought.

If you’re wondering how to properly plan for taxes during retirement, contact the professionals at Henson & Murtha CPAs to prepare yourself for retirement today.


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