Imagine you are approaching your retirement. After years and years of work and saving, you’ve finally reached the point in your life where you can leave the workforce behind and enjoy your remaining years in comfort and relaxation. You imagine this transition to the retired lifestyle going off without a hitch — but then you learn about the taxes involved with your retirement savings.
Depending on how you have planned out your retirement, in addition to numerous other factors, the taxes that apply to your retirement savings will vary. But there are cases where someone’s nest egg loses 30 percent or more to taxes. You can plan your retirement better and protect yourself from — or at least prepare yourself for — these taxes.
An easy first step is to reduce your financial obligations going into retirement. Pay off your mortgage, clear out old credit card debt, and get out from under any student debt you may still be carrying. Another crucial step is to diversify your funds. It’s a cliche — you’ve probably heard “diversify your portfolio” more times than you can count — but it’s important. Diversify your retirement accounts and trusts so that you have multiple sources of money from which to draw.
Third, you should create a plan for how you draw from your retirement accounts. Depending on the order of which you utilize your accounts, it will change how you are taxed. Discuss these things with a financial professional. Last but not least, do everything you can to reduce your adjusted gross income. Your adjusted gross income determines how you are taxed, and the lower you keep this number, the more money you will retain.
Source: FOX Business, “4 Tips for Reducing Your Taxes in Retirement,” Kathryn Buschman Vasel, June 6, 2014