4. Minimizing taxes
Though a lot of people expect their taxes to go down during retirement, that may not always be the case. Most pensions, a portion of your Social Security, annuity distributions, or monthly payments will all be taxed and you may find your tax rate hasn’t changed at all since your working days.
Withdrawals from 401(k) and traditional IRAs are also taxed. Say, for example, that you managed to save $1 million in a traditional IRA. Don’ expect you’ll be seeing all of that money. You might be able to use around $700,000- more or less depending on your tax bracket.
However, if you put money in a Roth IRA it means you already paid taxes when you made contributions, meaning that the money you’ll withdraw will be tax-free.
What’s more, you have to consider RDMs, required minimum distributions. In order for the government to recoup taxes that you didn’t pay on various retirement accounts, once you turn 72, you’ll be required to start withdrawing in order to pay up, and Uncle Sam doesn’t play around.
So, can retirees minimize taxes? Yes, they can, but it takes a lot of planning and knowing when to withdraw money and from which accounts. The order in which you do this is important, and it may work against other financial plans of yours, so be careful and make sure you plan way ahead of time in order to not make any mistakes.
