Navigating taxes on retirement income

Approaching retirement means a time of many changes, some long-awaited— the chance to travel, pursue hobbies, and enjoy time with family— and others that you may just be starting to consider, like how your tax responsibilities and income may change. In this article we’ll explore some key aspects of helping to ensure a smooth transition into your retirement: from portfolio considerations to taxes on retirement income and how to make sure you’re set up for long-term stability and the secure future for which you’ve worked so hard.

Considering potential tax changes in retirement planning

You probably know that your retirement income will be determined by how you have planned thus far and how you have structured your portfolio and savings. It’s important to remember that based on these decisions and strategies, as well as your other assets, you may find your tax bracket changes upon retirement. Make sure you discuss this with your financial professional who can provide advice on how to navigate any changes confidently. 

Just like planning for retirement in general, being proactive about tax planning can be a key element in ensuring a comfortable retirement. Your financial professional can make sure you are fully informed about and prepared for personal income changes as well as strategies to ease tax burdens. Some of the factors that will influence your tax liability in retirement are:

• Sources of retirement income, including Social Security, pensions, and your investment portfolio
• Withdrawals from retirement accounts including 401(k), 403(b) and Roth IRAs
• Health care expenses 
• Property taxes and deductions
• State-specific taxes

Understanding tax implications for different retirement investment accounts

Based on your individual circumstances as defined by the factors above, your financial professional can work with you to maximize your tax savings as you move into retirement. Your retirement accounts offer distinct types of tax advantages which may determine how you use them and when and how much you withdraw:

• Tax-deferred plans include traditional IRAs (Independent Retirement Accounts) and employer-sponsored plans such as 401(k)s and 403(b)s. With these plans contributions are tax-deductible and earnings grow tax-free.
• Tax-exempt plans like Roth IRAs allow contributions to be made with after-tax dollars. Returns grow tax-free and withdrawals are not taxed. 

There are some general strategies to using these different tax-advantaged retirement accounts effectively:

• Maximize Contributions: Contribute the maximum allowed amount to your retirement accounts each year. For example, in 2024, individuals under 50 can contribute up to $7,000 to IRAs and $23,000 to 401(k)s.  Check irs.gov for the current limits since they usually change each year.
• Take Advantage of Employer Matches: If your employer offers a 401(k) match, contribute at least enough to get the full match.
• Diversify Account Types: Consider having a mix of traditional and Roth accounts. This provides some flexibility for managing tax implications.
  
   

Maximize tax savings in retirement 

With a full understanding of your retirement and investment portfolio and the guidance of an experienced financial professional, you can explore various strategies to help you manage your tax liabilities in retirement. Some options to consider include:

• Understand how various types of income are taxed: Diversify your retirement income sources to include taxable, tax-deferred, and tax-free income. 
• Required Minimum Distributions (RMDs) and Strategic Withdrawals: Tax-deferred accounts require minimum distributions to begin at age 72. Depending on when you plan to retire and your individual portfolio, it’s often wise to first draw from taxable income sources to allow tax-deferred accounts to continue to grow as long as possible. 
• Roth Conversion: Depending on your situation, consider converting some traditional IRA funds to Roth IRAs. While this incurs immediate taxes, it can result in tax-free withdrawals in retirement.
• Consider Health Savings Accounts (HSAs): If eligible, contribute to an HSA. While primarily for medical expenses, after age 65, you can withdraw funds for any purpose penalty-free (though regular income tax applies).
• Leveraging deductions and credits in retirement: Both charitable contributions and health care expenses can be tax-deductible. Your financial professional can help guide you through decisions regarding philanthropy and planning for health care costs. 

Tax liabilities and lifestyle

You’ve worked so hard to be able to enjoy your retirement. Understanding the factors and dynamics that will impact your income, taxes and overall spending plan will allow you to feel confident that your savings and investments will support the lifestyle you desire. If you have a mortgage or other debts you will likely want to prioritize repayment as soon as possible. You likely already have a sense of your expenses and overall budget, but it’s smart to review and consider whether there are costs you can avoid or additions you may want to include based on future plans. 

Long-term planning with the assistance of a financial professional is essential for sustaining retirement income and optimizing tax benefits. Creating a comprehensive plan and periodically re-visiting it will help you prepare to consider adjustments or re-balance your portfolio based on changing circumstances over time. These steps can make all the difference as you prioritize the ways you want to spend your retirement— whether with travel, hobbies, or quality time with loved ones— and prepare for contingencies (such as the possible need for long-term care) that may arise. 

Since tax law and investment recommendations are occasionally revised based on your personal situation, professional guidance will help ensure you stay up to date through every phase of planning, and help you feel confident in the transition from career to retirement.

Conclusion

Now that you understand the various aspects of your financial plan, retirement savings, and potential tax liabilities on your retirement income, you can take pro-active steps to make sure your existing strategy is up-to-speed with your needs now, and in the short- and long-term future. Your financial professional is prepared to address all your questions and guide you through any necessary decision-making. Reach out today to discuss your current retirement plan, timeline and goals and get the guidance you need to feel prepared for your tax responsibilities and confident that you can enjoy the time you’ve worked so hard to earn.