Don Dirren Shares 5 Things You Can Do Now to Reduce Your Tax Burden in Retirement
If you’re like most people, you don’t want to watch your hard-saved retirement dollars dwindle into nothingness due to high taxes. Fortunately, there are things you can do today that will help you avoid high taxes in retirement. Don Dirren is a financial advisor and risk management expert located in Arizona. He shares five things you can do now to help reduce your tax burden when you retire.
1. Invest in More Tax-Free Mediums
Some retirement investments or savings are considered tax-deferred. You receive a discount on your taxable income now equal to the amount invested in these options. This includes things like traditional 401(k)s and Individual Retirement Accounts (IRAs).
When this occurs, you’re not avoiding taxes on the money. Instead, you’re deferring your taxes until you withdraw those funds in retirement. You should absolutely take advantage of employer-sponsored traditional 401(k)s, especially if your employer is matching funds.
However, you should also consider investing in tax-free options. With these options, you use the money you’ve already paid taxes on to invest. Then, when you withdraw funds from these accounts in retirement, you do not need to pay taxes a second time. These include Roth IRAs and Roth 401(k)s.
2. Plan Your Retirement for the Big Picture
This means you need to be mindful of the types of retirement accounts you have. While you have little control over the type of 401(k) your company offers, you can control your IRA investments. More importantly, you can choose the types of investments that go into various accounts.
For instance, you’ll want to take advantage of the most tax-efficient investment options for your taxable retirement accounts. These include things like:
-Tax-exempt municipal bonds.
-Exchange-Traded Funds (ETFs).
-When it comes to tax-free accounts, you’ll want to use tax-inefficient investment options. These include things like:
-Real Estate Investment Trusts (REITs).
-Doing these things will help you to preserve your gains without unnecessary tax burdens for your efforts.
3. Be Mindful of Required Minimum Distributions (RMDs)
Once you reach the age of 72, it is necessary to withdraw at least a minimum amount from your IRAs and 401(k)s annually. Failing to do so can result in hefty penalties, up to 50 percent of the required distribution amount. You will have to pay taxes on the income from traditional IRAs and 401(k)s withdrawn in this manner.
The goal, Don Dirren states, if you’re hoping to reduce your retirement tax burden, is to plan now to have as little as possible invested in taxable accounts. You want the bulk of your investments in tax-free mediums. Ultimately, you want to plan so that your withdrawn income doesn’t accidentally place you in a higher tax bracket.
4. Time Your Withdrawals Wisely
You do have some flexibility when it comes to the timing of your withdrawals. Consider working with a financial advisor to help you time your withdrawals so that you can avoid a large tax bill and maintain a lower tax bracket from year to year.
Long-range tax planning can help you understand the best strategy for year-to-year withdrawals so that you can coordinate your Social Security benefits so that you can maximize your income while minimizing your tax burden throughout retirement.
5. Choose Your Retirement Location Wisely
Many people focus their attention only on federal taxes when planning for retirement. The fact is that many states have substantial state income taxes to consider as well. You could choose a retirement location that further maximizes your tax savings by moving to one of the many states that either has no income taxes or low income taxes, such as:
Of course, you will want to do your own research into costs of living to determine which state has the most to offer you in the way of maximizing your retirement income. Other states, like Arizona, Indiana, South Carolina, and Tennessee have low income tax burdens. While New York, Maryland, California, Minnesota, and Oregon have among the highest.
Don Dirren understands the challenges of planning a tax-efficient retirement. These tips will help you get more mileage from your money when your time to retire comes around.