Personal FinanceTop 5 Strategies For Tax Retirement Planning

SpenderrificAugust 16, 20213512 min

“If you fail to plan, you plan to fail!” – Benjamin Franklin


You have probably heard this endless times. Well, it is solid advice. A secure financial future requires good planning, especially when it involves your retirement life.

In the past, social security and pension were just enough to enjoy retirement. Not anymore!

Today, to enjoy financial security in retirement, you need regular cash flows. That means you need to fund your post-work life while you can. But, as you work hard to save for your later years, remember that you still have to pay taxes after retirement.

Don’t be one of those retirees who are caught by surprise when they still have to pay taxes on pension and social security benefits. 

Having no plans may prove to be a costly mistake, but excellent tax planning will help reduce the impact of taxes on your post-work finances.

Related Post: How much to save for retirement

Strategies For Reducing Your Tax Liability in Retirement

1. Relocate to a tax-friendly state

Moving to a state with lower taxes or tax breaks can produce tax savings. For example, some states do not charge income tax on pension income, social security benefits, and distributions from retirement plans. Consider relocating to any of these states when you retire.

For instance, Florida is one of the most tax-friendly states for retirees, making the state a retirement destination for many bloomers. If you don’t mind, the warmer climate may also benefit your health as you grow older.

Should you worry about receiving a tax bill from the state where you earned your income? No. Since 1996, the state where you earned income cannot tax your income after relocating from the state.

Look at your situation carefully, and decide if relocating is a great option for you.

2. Consider a Roth IRA Switch

Individual Retirement Accounts (IRAs) are investment accounts designed to help you save for retirement. 401(k)s are set up by employers, while individuals voluntarily set up IRAs. There are various kinds of IRAs.

Roth IRAs provide retirees with tax-free withdrawals because contributions to them are made after-tax. At the age of 59½ or after contributing for five years, you can make tax-free withdrawals from a Roth IRA without paying any penalty. This style differs from the deferred tax style of traditional IRAs that delays the tax burden till you retire.

If you leave your employer, you can convert your 401(k) to a Roth IRA when you exit. You are also allowed to maintain other types of IRAs for their unique advantages. For example, traditional IRAs allow you to defer taxes and benefit from compound growth. However, the IRS limits contributions to $6000 per annum.

More than 10,000 boomers retire every day. As they receive their social security benefits, the payouts will strain government resources. Increased government expenditure may lead to an increase in tax. If you defer taxes till later, you might have to pay taxes at the prevailing rate.

3. Fixed index annuities

These are contracts between individuals and insurance companies. A fixed index annuity is a long-term savings option where the insurance company gives you a lifetime income in exchange for the money you saved up.

While returns depend on an underlying index such as the S&P 500, it is not a direct investment on the index. Therefore, if the market tanks, you still get paid for the year.

This financial product has potential for growth while giving you downside protection. It has other benefits.

  •       You get to enjoy tax deferrals which allow you to benefit from compound growth.
  •       Your principal does not decline when the index performs negatively.
  •       You can also pass on your assets to beneficiaries.

The best way to go about this is to get the help of a professional financial advisor. 

Read more about Want To Invest In an Index Fund? Keep This in Mind

4. Purchase a life insurance policy

If you have maxed out your contributions to your IRA for the year, remember that there is no limit to how much you can put into permanent life insurance. In addition, dividend payments can be a significant source of income for retirees.

A life insurance policy might give you the option of borrowing against your cash value. When you borrow, the IRS doesn’t consider the loan to be taxable income. Should you decide not to pay back the amount you borrowed, the insurance company will offset the loan with your cash value. Taking a loan and not repaying it will give you access to your liquid cash without tax payments.

Beneficiaries of life insurance policies do not pay income tax on death benefits. However, they may be subject to federal inheritance tax if the payout is part of your estate. But you may avoid inheritance taxes if you put the life insurance policy in a trust.

Older citizens are especially vulnerable to health problems. Therefore, life insurance can come in handy when you encounter high healthcare costs in old age, making retirement easier.

5. Consider An In-service Rollover

While Company-sponsored 401(k)s may be perfect for saving money, they are not optimal for retirement tax planning.

Some 401(k) plans allow you to transfer funds from your 401(k) into your IRA while working for your current employer. If your 401(k) plan allows this, use the opportunity to create a great future for yourself.

The money you have saved up over the years might push you into a higher tax bracket, leading to higher taxes.

You can plan the best retirement life. But, if you don’t take taxes into account, you could lose most of your saved-up funds paying the taxman. To avoid expensive taxes, consider applying the various strategies considered in this article. They will help you stretch your resources for as long as possible. 

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