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Preparing for retirement can be a daunting task. Not only is it difficult to know just how much money you're going to need (or want) in retirement, but preparing for a new life beyond the office is emotionally and mentally draining—especially when it's time to rely on sources of income other than your job.
To make matters more stressful, taxes can take an enormous chunk away from the monthly nest egg you've worked so hard to procure over the last several decades. Even the savviest of investors often neglect tax planning and it's a mistake that can cost you tens of thousands or even hundreds of thousands over the span of your retirement life.
Don't risk not having the retirement income you're wishing for and expecting. Tax planning is complex and every situation is different. The best way to protect your retirement nest egg is to consult with a qualified expert like those at B.O.S.S. Retirement Solutions & Advisors.
There are dozens of strategies for making sure you don't pay unnecessary taxes on your retirement income. As an example, here are seven simple retirement tax secrets that could help you keep more of your money.
Remember to track your Medicare premiums
In retirement, it's vital to save tax dollars wherever you can in order to maximize the amount of money coming in each month.
According to Medicareresource.org, "Self-employed people (who earn a profit from their self-employment) are allowed to deduct their health insurance premiums on Schedule 1 of the 1040, as an "above the line" deduction — which means it lowers their AGI."
Even retirees who are not self-employed may be able to include Part B premiums as an itemized deduction on your Schedule A.
Roth IRAs are your friend
Here's something your future self will thank you for — putting money away into an individual retirement account (IRA).
The two main types of IRAs are Roth and traditional. The primary difference between the two accounts has to do with taxes. With a traditional IRA, you pay taxes on the money once you retire and withdraw funds from your account. Roth IRA money is taxed upfront, so withdrawals during retirement are tax-free.
While there are advantages and disadvantages to both, Jean Folger in an Investopedia article explains, "It may be advantageous to convert an existing traditional IRA to a Roth IRA. A Roth account often makes more sense if you're likely to be in a higher tax bracket in retirement than you are in now."
Converting to a Roth IRA removes the uncertainty of future taxes, where the rates could be higher. Because everyone's situation is different, it's best to talk to a financial expert to find the right solution for your circumstances.
Know the required minimum distributions
Sadly, your retirement account doesn't exactly act as a vault where you can safely lock up your money forever. Starting at age 72, you'll have to withdraw a certain amount from your account each year. The IRS calls this a required minimum distribution (RMD).
The amount you have to withdraw depends on how much money you had in your account at the end of the previous year divided by a life expectancy factor set by the IRS. Even if you don't need the money, you're required to withdraw some each year. If you don't, you'll get hit with a hefty penalty.
The good news is that RMDs do not apply to Roth IRAs, which is another reason you might want to consider setting up a Roth IRA.
Space out withdrawals
Another thing to keep an eye on is how much you withdraw in a year. Investopedia warns that withdrawals could land you in a higher tax bracket, depending on the type of retirement account and how much you withdraw from it. So, be careful!
Diversify your options
The old saying, "don't put all your eggs into one basket" certainly applies to retirement savings. Though it would be easier to have one fool-proof way of protecting your money, the simple fact is that no one can predict the future.
Since you don't know what your exact financial status or tax bracket will be by the time you retire, it's a good idea to mix things up. According to Bankrate, "diversification can actually reduce risk without costing your returns." One example of diversification would be to put money into tax-free, tax-deferred and taxable accounts to gain flexibility in withdrawals.
Discover the advantages of annuities and life insurance
Aside from your retirement account, there are other tax-advantaged ways to save for the future. Life insurance policies and annuities are two of them.
NerdWallet points out that whole life insurance policies come with tax advantages and can supplement your income — provided they're a good fit for you.
And according to Kiplinger, "Annuities can help you save for retirement, reduce risk, cut your taxes and guarantee a lifetime income." However, once again, it's a good idea to speak with your financial advisor to determine if this is a good option.
The tax world is overwhelming — remember to use the experts
Don't be alarmed if all of the above information feels confusing — for most people, it is! But that's where an experienced financial advisor comes in handy. Work with an advisor to walk that balancing act of how much to draw from which sources, maximizing income, and minimizing your tax bill. If you have $200k or more saved for retirement and want to learn exactly how much money you could see in taxes in retirement, schedule a free Retirement Tax Analysis with one of our fiduciary advisors by clicking here or calling 801-216-3683.
Ryan Thacker and Tyson Thacker are the Founders of B.O.S.S. Retirement Solutions with 6 offices throughout greater Salt Lake City. They are three-time winners of Utah's Best of State Award.
Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and no statement contained herein shall constitute tax, legal or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. Our firm is not affiliated with the U.S. government or any governmental agency.