How To Reduce Taxes On Your Retirement Income

Will you pay higher taxes in retirement? It’s possible. But that will largely depend on how you generate income. Will it be from working? Will it be from retirement plans? And if it does come from retirement plans, it’s important to understand which types of plans will be financing your retirement.

Social Security

A big factor to take into consideration is the role Social Security will play in your retirement. When do you plan to start to take Social Security benefits? If you have a spouse, when do they plan on taking benefits? It’s critical to answer key Social Security benefits questions so you have a better understanding of how it will affect your taxable income.

Pre-Tax Investments

What’s a pre-tax investment? Traditional IRAs and 401(k)s are examples of pre-tax investments that are designed to help you save for retirement.

You won’t pay any taxes on the contributions you make to these accounts until you start to take distributions. Pre-tax investments are also called tax-deferred investments, as the money you accumulate in these accounts can benefit from tax-deferred growth.

For individuals covered by a retirement plan at work, the tax deduction for a traditional IRA in 2021 is phased out for incomes between $105,000 and $125,000 for married couples filing jointly, and between $66,000 and $76,000 for single filers.1

Keep in mind that once you reach age 73, you must begin taking required minimum distributions from a traditional IRA, 401(k), and other defined contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

After-Tax Investments

What’s an after-tax investment? A Roth IRA is the most well-known. When you put money into a Roth IRA, the contribution is made with after-tax dollars. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2021, contributions to a Roth IRA are phased out between $198,000 and $208,000 for married couples filing jointly and between $125,000 and $140,000 for single filers.2

To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

What To Do Next

Are you striving for greater tax efficiency in retirement? It all starts with a strategy that takes advantage of the financial & tax loopholes that are typically reserved for the super wealthy. Our strategic planning team here at AQuest Wealth works cohesively to make lux level strategies like this available to hard-working Americans.

We proactively infuse tax management into your strategy to help you outsmart uncle sam, so you can focus on enjoying your life. Click the button below to learn more about what sets our firm apart and why thousands of clients trust us to guide them in pursuing their dream retirement.

1. IRS.gov, November 16, 2020
2. IRS.gov, June 26, 2021

Securities and advisory services through LPL Financial, a registered investment advisor, Member FINRA & SIPC. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. AQuest Wealth Strategies and LPL Financial do not provide tax advice or legal advice/services. Please consult your tax or legal advisor regarding your specific situation. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. This site is not a part of the Facebook website or Facebook Inc. Additionally, this site is NOT endorsed by Facebook in any way. FACEBOOK is a trademark of FACEBOOK, Inc @ 2023 | Privacy Policy