How to Reduce Taxes on Your Retirement Savings

I’d like to share with you some ideas of maybe how to reduce taxes on your retirement savings. So let’s talk about how taxation is so vital to a healthy retirement plan. And don’t worry if you’re part way through your retirement and you’re thinking well, I haven’t really thought about that. You’re not too late to begin planning. There’s never a concern there. So let’s start first with just simply looking at contributing while you’re working into your say 401K or 403B, 457. You know so this is going to be handled through payroll. So you’re going to get a tax break today on that money. I think today in 2023, the max is about $22,500. So that’s something that you should be considering to try your best to ultimately max out contributions into that type of retirement plan or in place of or potentially along with your 401K you may consider a traditional IRA. There’s a maximum of $6,500 as contribution. So this is something where when a traditional IRA contribution occurs, you’re going to get a deduction on your tax return. And there’s going to be different income limitations that you need to take into consideration. Now going in a different direction here with tax planning, what about considering a Roth 401K? So that’s something we’re seeing more and more employers within 401K plans offer a Roth option. So this is going to be your after-tax dollars. The growth will be tax-free and then have future withdrawals later on. So it may be tough to know exactly what your future situation is going to look like, but having some tax-free money in retirement is definitely attractive. And along with this comes then a Roth IRA. Which again is going to be another future tax-free account when you structure that properly and wait long enough to take withdrawals. So here’s the way I look at it. Let’s imagine for a moment that you’re a Farmer. And the Roth is like okay, I’m going to pay tax on the seed that goes in the ground, but then the entire harvest not going to have to worry about tax on that later on. So that’s hopefully a helpful visual for you. And then the other area that I wanted to talk about is catch up contributions. So when you’re age 50 and older, all of a sudden there’s an extra $7,500 for your 401K that you can contribute into. Another $1K for IRAs, Roth IRAs, etc. So again, that’s at age 50 and older. There’s also a saver’s credit. When you’re income is under $36,500 for individuals or $73K for married couples where you can contribute to your 401K or IRA and there’s like a $2K credit for individuals, $4K with married couples. So something like that I definitely encourage you to talk to your tax preparer to see if you would qualify for something along those lines. One thing you want to do as you build this retirement plan ultimately is avoid early withdrawal penalties. So IRAs are age 59.5 with certain 401K plans and retirement and all that, after age 55 it opens up some opportunities where you can access that money. But there are different ways if you’re in a situation and you need to, really need that money there might be ways that again your Financial Advisor may be able to help you structure that in a way where you could avoid some of those penalties. Another area, don’t forget about those required minimum distributions. So that’s now been pushed to age 73 or it’s actually going to be age 75 beginning in 2033. So something to be looking at as time moves along. And the other area is ideally doing your best to delay the 401K or IRA withdrawals while you’re still working. I mean ultimately you want to be contributing during those years and avoiding touching that money at best as you can. And lastly, an area that is a lot more complex, but talking about Roth conversions. And how to transition traditional IRA or 401K money over to Roth. There may be some long-term benefits that could help you access some tax-free money later on. So here at Centennial Wealth Advisory we have a tax team of professionals that ultimately look at your personal situation year in and year out to determine what the best approach is. So if you have questions about that, feel free to give us a call.