Remember back to when you received your first paycheck. You were so excited. You knew how much you were earning per hour and how many hours you worked, and you couldn’t wait to go out and splurge on something you’ve been dying to get. You were handed your paycheck envelope and tore into it with great anticipation and … wait a minute … that’s not even close to what you expected.
This was your first hard lesson about taxes – the government wants a piece of what you earn at work.
Unfortunately, stopping work in retirement doesn’t mean the taxes stop too. But making a plan now to mitigate risks like rising taxes can help prevent unfortunate surprises while you’re trying to enjoy your golden years.
Thinking through how your retirement savings and income will be taxed – and creating a tax-efficient withdrawal strategy to minimize the effect of taxation – can help you have a better idea of how much money will end up in your pocket instead of Uncle Sam’s. Of course, there is some uncertainty – taxes change. Rates could go up or down in the years ahead.
In the most recent Quarterly Market Perceptions Study from Allianz Life, 64% of respondents said they worry that their income will not keep pace with tax increases. And taxes, along with other factors, are leading 61% of respondents to say that they are worried that their current financial strategy will not provide the lifestyle they would like to have in retirement.
The good news is, current tax laws provide options to help that reduce taxable income, such as tax credits, increased standard deductions and pre-tax or after-tax retirement plans.
It will come as no surprise that not all tax provisions will lower your taxes. The deduction limits on state and local income tax (only up to $10,000 per tax return is deductible), increased taxes for Medicare on high earners, and varying rates on long-term capital gains could result in a higher tax bill. So you’ll want to work closely with your financial professional, as well as a tax advisor, as you navigate your approach to reducing taxes on your retirement income.
No matter what, you want to have a tax-efficient strategy. Here are a few strategies to consider that can mitigate some of the effect of taxes during retirement.
1. Consider Roth IRA conversions
A common way that many save money for retirement is to put money aside in an employer-sponsored plan or an IRA. These retirement savings vehicles let you invest pre-tax dollars and, hopefully, enjoy tax-deferred growth over time. The trade-off, though, is that taxes will be due when you start withdrawing that money to …….