Ways to Avoid Retirement Savings Tax Issues

Taxes continue even after you retire. Choosing not to pay attention to the possibility of taxes incurred during retirement could substantially lower your standard of living in retirement. To make matters even more complex, some of the common-sense strategies that people utilize to reduce taxes can lead to paying more in retirement and on inheritances. 


This article reviews just one of many strategies that can be utilized to minimize the amount of taxes that you end up paying in retirement.


# 1 – Make the Most of Timing


You should create a plan to assess when you can take retirement contributions. For example, many people first draw funds from their Roth IRAs and taxable investment accounts before utilizing IRAs. Failure to create and adhere to a plan can lead to you inadvertently ending up in a higher than desired tax bracket.


# 2 – Plan Around the Secure Act


The SECURE Act has impacted many regulations regarding retirement income planning. For retirees, the Act substantially limits who can utilize a stretch IRA. For many non-spousal beneficiaries, the Act impacts how you handle your inherited IRAs as well as what taxes you owe on withdrawals. 


In light of the Secure Act, it’s a good idea to revisit retirement planning strategies and implement techniques to tax complications created as a result of this change.


# 3 – Make the Most of Roth IRAs


You should take advantage of a Roth IRA whenever it’s possible to do so. Remember, you do not receive a tax deduction when you contribute to either a Roth IRA or Roth 401(k). Contributions to these accounts, however, grow tax-free. For people who are eligible to contribute, Roth IRAs are a particularly valuable estate planning tool due to tax-free income. Roth IRAs can also help protect you from future tax increases. 


While there are no income limits for Roth 401(k)s, there are still contribution limits. When deciding between a Roth IRA, a traditional IRA, a Roth 401(k), or a traditional 401(k), it’s a good idea to utilize a Roth account if you are in the 24% tax bracket or below. For people in the higher federal tax bracket, they will likely prevail with traditional options.


# 4 – Consider Utilizing Life Insurance 


Although IRAs might not last long, life insurance might end up functioning as a new stretch IRA. With a properly created life insurance plan, you can provide your beneficiaries with a greater inheritance and a smaller tax bill. In many situations, high net worth households utilize life insurance proceeds to pay unavailable estate taxes and income taxes on assets in the way that an inherited IRA would.


Contact an Experienced Elder Law Attorney


Taxes are one of the few certainties in life. With adequate planning, however, it’s possible to minimize the amount of taxes that you pay as part of your estate. To make sure you are prepared to navigate taxes associated with your estate, you should not hesitate to speak with an experienced attorney. Contact Ettinger Law Firm today to schedule a free case evaluation.


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