Most people spend years working closely with their financial adviser, accumulating money in their retirement accounts. When the time comes to reap the rewards of all those years of labor, the reality of how much you’ll be taxed on your withdrawals hits you.
While you can’t completely avoid being taxed on accounts that were tax-deferred, you can implement a strategy that is advantageous. Consider the following four tips to help you with your retirement withdrawal strategy.
- Withdraw from tax-deferred accounts first. Consider using the funds from 401(k) or IRA accounts first. Some of the investment growth from these accounts would at least be taxed at a lower long-term capital gains rate. Additionally, losses in these accounts in a bad market year can offset the taxes on withdrawals.
- Save tax-free accounts for last. Well, they are not exactly tax-free, but they are accounts you already paid taxes on when you deposited the money, such as Roth plans. Saving these for last allows their balances to continue to grow without the burden of taxes, giving your retirement an extra boost.
- Don’t be too fiscally conservative. The federal government requires you to withdraw a certain minimum amount, known as Required Minimum Distributions (RMDs), from IRAs and 401(k)s by the time you are 70 1/2. Failure to comply carries a 50 percent tax on the amount remaining. If you are draining one account at a time, be sure to make the required withdrawals by the cut-off.
- Be flexible. Financial needs and circumstances change. While taxes are a primary concern regarding retirement withdrawals, realize there are other factors to consider as well. How much will you withdraw each year so that you have income the rest of your life? Are your accounts growing or decreasing based on market performance? How will new legislation affect the way you withdrawal your money? These factors need to be considered before and during your retirement. Be ready to make adjustments when it’s warranted.
You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner. While financial planners manage your stock portfolio, a CPA is a valuable addition to your long-term financial plan. Our Dallas CPA Firm specializes in tax planning and tax preparation in order to minimize your tax burden. Contact us today for an appointment.
