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August 16, 2018

4 Tax-Effective Retirement Strategies

4 Tax-effective retirement strategies

These tax-effective retirement strategies can keep your taxes in check as you start another chapter of your life. Read on for a look at how you can manage just how much of your retirement income is taxed.

Retirement is an exciting time. If you don't understand the principles behind taxable income in retirement, however, it can also be a confusing time. 

There are a number of tax-effective retirement strategies you can apply to navigate taxes in your retirement years. 

1. Make withdrawals from taxable accounts FIRST 

It's tempting to withdraw funds tax-free accounts (like Roth IRA's) first since there's no obligation to Uncle Sam. 

But unless you're 70 years of age or older, resist the urge to pull this money. 

Why? You'll see more growth the longer you keep funds in a tax-exempt account.  

Instead, follow these tax-effective retirement strategies when it comes to withdrawal order:

  • 1
    Taxable accounts (mutual funds, stocks, bonds, etc.)
  • 2
    Tax-deferred accounts
  • 3
    Tax-exempt accounts

If you're over the age of 70 1/2 years, however, you want to pull the Required Minimum Distributions from any tax-deferred or tax-exempt accounts you have FIRST. That way, you're not subject to an IRS penalty. 

2. Go for long-term capital gains

There's a reason taxable retirement savings tactics aren't as popular as their tax-free counterparts. 

Taxable investments may leave many retirees feeling like they're losing out a portion of their financial gains. For that reason, it can be tempting to get and sell as soon as you start seeing returns. 

Don't do it. 

Two types of taxes can be applied to profits you see from taxable investments: short-term and long-term capital gains taxes. 

Short-term capital gains (assets that you've held for less than a year and sold) are taxed at the same rate as regular income tax. That typically ranges anywhere from 10 to 37 percent depending on your tax bracket. 

But Long-term capital gains (assets you've held for more than a year) are usually never taxed over 15 percent. 

3. Keep your tax bracket down

The higher your tax bracket, the more you'll pay in income taxes. 

Retirement account withdrawals can easily bump you into the next tax bracket and increase the amount you pay. 

Ideally, you want to keep your income tax bracket under 15 percent. And there are a couple of ways you can do that. 

  • 1
    Reduce expenses. Keeping your expenses low in retirement means that you'll make smaller withdrawals, which equals less taxable income.  
  • 2
    Predetermine your ideal tax bracket. If you have a clear idea of a marginal tax rate, you can determine where you want to be when you factor in any additional taxable income. Then withdraw from both taxable and nontaxable sources as needed. 

4. Give yourself options

Overall, the best tax-effective retirement strategies rely on one simple principle: having a diversity of taxable and non-taxable accounts to rely on. 

That's why it's really important in your working years to place money into several different accounts of different forms. 

That way you have more flexibility and can take control of how much taxes are being pulled from your retirement. 

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Felix Mwania

I live in the intersection of technology and entrepreneurship. I am a technology enthusiast but my passion is helping small businesses succeed, including mine.

When I am not working, you will find me goofing with my wife and kids. When not with family and/or friends, you will find me doing some home improvement projects.

Felix Mwania


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