Tips on Lowering Your Tax Burden on Retirement Funds

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About Rick Dennis

CFF®
Rick Dennis, CFF (Certified Financial Fiduciary®), is the President of Conservative Retirement Solutions, LLC, a Houston-based retirement planning company. Rick started his company in 2004 after he witnessed the negative impact the stock market crash of 2000-2002 had on the retirement accounts of his fellow Baby Boomers. Rick’s company provides financial education for people who want “safe, secure, and guaranteed” retirements and focuses on helping clients learn about financial options they may not know about. During his professional career, Rick has taught numerous classes about current events and how they affect an individual’s retirement. Rick advocates a common-sense approach to financial planning and believes that the necessary money should be kept safe and secure.

Saving for retirement is a long game, and one of the smartest plays you can make is minimizing your tax bill. The more money you keep in your nest egg, the more you’ll have to support the retirement lifestyle you envision. Here’s a breakdown of how to reduce the taxes you pay on those hard-earned retirement dollars.

The Power of Tax-Advantaged Accounts

The key to tax-smart retirement saving is understanding the different types of retirement accounts:

  • Traditional 401(k) and IRA: Contributions are generally tax-deductible in the year you make them, lowering your current taxable income. However, you’ll pay taxes when you withdraw money in retirement.
  • Roth 401(k) and Roth IRA: Contributions are made with after-tax dollars, so you don’t get an immediate deduction. But in retirement, withdrawals from qualifying accounts are tax-free!

10 Strategies to Slash Your Retirement Tax Bill

  1. Max out your 401(k): If your employer offers a 401(k), take full advantage. Traditional 401(k) contributions may be an instant tax break since they reduce your taxable income now.
  2. Embrace the Roth option:  Consider splitting your savings between a traditional and Roth 401(k), if offered. Roth gives you the potential for tax-free income later – a great hedge against future tax uncertainties.
  3. Tap into IRAs: Contribute as much as you can to a traditional or Roth IRA. While traditional IRA deductions may be limited with a workplace plan, Roths offer the same fabulous tax-free growth and withdrawal benefits.
  4. Catch-up contributions:  If you’re 50 or older, the IRS gives you a bonus tax break – larger contribution limits to help beef up your savings.
  5. Leverage the saver’s credit: Low-to-moderate income earners may qualify for an additional tax credit for saving in a 401(k) or IRA.
  6. Avoid early withdrawals:  Pulling money out of retirement accounts before age 59 ½ (or 55 in some cases) usually means a 10% penalty on top of income taxes. Plan ahead to avoid this.
  7. Remember those RMDs:  Once you hit 73, required minimum distributions kick in. Miss a withdrawal, and you’ll owe a hefty penalty.
  8. Keep working? Delay 401(k) withdrawals: If you work for your current employer past age 73, you might be able to postpone 401(k) withdrawals until you actually retire.
  9. Time your withdrawals wisely:  Strategically timing when you tap into your various retirement accounts (taxable vs. tax-free) can help you manage your overall tax burden year to year.
  10. Get professional help: A tax advisor or financial planner can create a personalized strategy that balances your current tax needs with your retirement goals.

The Bottom Line

Reducing taxes on your retirement savings isn’t just about paying less to the government – it’s about giving your future self the biggest possible financial cushion. Understanding the different account types and taking advantage of the available tax breaks will help you reach your financial finish line with more in your pocket.

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About Rick Dennis

Rick Dennis, CFF (Certified Financial Fiduciary®), is the President of Conservative Retirement Solutions, LLC, a Houston-based retirement planning company. Rick started his company in 2004 after he witnessed the negative impact the stock market crash of 2000-2002 had on the retirement accounts of his fellow Baby Boomers. Rick’s company provides financial education for people who want “safe, secure, and guaranteed” retirements and focuses on helping clients learn about financial options they may not know about. During his professional career, Rick has taught numerous classes about current events and how they affect an individual’s retirement. Rick advocates a common-sense approach to financial planning and believes that the necessary money should be kept safe and secure.

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Content in our posted articles is deemed to be accurate but topics, facts and laws can change. It is always a good idea to verify facts before making decisions. Always seek authorized and professional advice regarding financial decisions which includes investing, annuity purchases, tax planning, changes in a financial portfolio and retirement planning.

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