Tax Planning for Retirement: Strategies to Keep More of Your Hard-Earned Savings
Preparing for retirement is one of the smartest and best financial decisions you can make. Getting an early start will only bring benefits in the long run. That's why you should consider one of the many retirement tax planning strategies. Knowing how each one works will help you be more prepared for the future. It will also help you decide how you want to allocate your savings when you need them.
For this reason, we have written this blog to help you learn some exceptional strategies to keep more of your hard-earned saving. To learn more about this, kindly scroll down and continue reading.
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Retirement Tax Planning Strategies
We are going to teach you ways to increase your retirement savings. But before then, let us look at some tax planning strategies. Some of the most common retirement tax strategies include your income from social security checks, 401(k) plans, IRAs, and senior tax credits. Other options are available, but we'll only focus on these four.
1. Income from social security checks
Most of us make payments into the Social Security program during our employment. However, once we are eligible to start receiving our Social Security checks, that income may be taxable. One of the good retirement tax planning strategies for social security income is to know your adjusted gross income. To avoid or reduce taxes or social security control, we must avoid reaching certain limits. For example, if we reach $25,000 as a single or $32,000 as a married couple, our Social Security Check will become taxable.
2. 401(k) plan
Many employers offer this retirement plan in which they make contributions that will later become our retirement resources. This is a fascinating retirement tax planning strategy because of its options. With a traditional 401(k) plan, our contributions will be made from pre-tax amounts, but any withdrawals will be taxable. However, with a Roth 401(k) plan, our contributions come from after-tax amounts, but withdrawals are not taxed.
3. Individual Retirement Accounts (IRAs)
Another excellent retirement tax planning strategy is to get an individual retirement account or IRA. Like 401(K) plans, there are two versions of IRAs to consider. We may choose a Traditional IRA or a Roth IRA for retirement funding. Like 401(K) plans, you can contribute to your Traditional IRA with money before taxes but with withdrawals subject to tax. If you opt for a Roth IRA, your contributions can come from after-tax money, avoiding withdrawal taxes. Our contribution amounts and other restrictions may depend on the adjusted gross income we report and whether we have individual or joint accounts.
4. Senior Tax Credits
The last alternative for a retirement tax planning strategy includes claiming a tax credit offered by the IRS. If you are age 65 or older, or if you retired due to permanent and total disability, you may be eligible for this credit. However, there are several limits that you must pass to qualify. For starters, if you are married, your spouse must file a joint return with you to qualify. Also, your income cannot exceed a certain amount to qualify for this credit.
Creating Your Retirement Strategy Team
As you begin to define and plan your retirement tax strategy, there are several resources that can help you. These include your employer, tax advisor, banker, mortgage consultant, retirement planning expert, and investment advisor.
If you work for a company, talking to your employer or union is a great place to start. (If you are self-employed, you can seek external professional advice). Think of these people as your retirement tactic squad. Take note of the advice they can offer you. The answers to these questions will help you determine how much longer you want and need to work (and save) to help ensure a healthy retirement.
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* Does the company offer a retirement plan?
* Does the company contribute or match the employee's contributions to the plan?
* What are other retirement benefits offered?
Your Accountant or Tax Adviser
* What sources of retirement income should I spend first to minimize my taxes?
* When can I start distributing money from my employer's retirement plan or IRA without incurring the additional 10% tax? (Currently, the answer is age 59½. You avoid the additional 10% IRS tax on dispersals from the qualified retirement plan).
Your Financial Adviser or Investment Professional
* Realistically, how much can I expect to earn on my investments? (Remember that investing always carries risk, and there are no guarantees. Some investments have more risk and more significant reward potential.)
Strategies to Increase Your Retirement Savings
Here are some suggestions for building the retirement savings you want:
1. Make Your Savings a Habit
Even if you're still in school, only working part-time, and can start with as little as $50 a month, the actual amount you can save is less significant than committing and sticking to it. Over time, you can always increase the amount you save, but you won't be able to compensate for the lost years of compound interest. So while it may be tempting to use your retirement savings as emergency savings, weighing the costs and potential penalties before acting is crucial.
2. Make it Automatic
If you create automatic savings, the possibility of forgetting to save for retirement is lesser. There are a few ways to set up automatic retirement savings. Consider automatically transferring funds from your paycheck to your retirement plan at work, and set up an automatic transfer from bank accounts to your IRA. This can help you save regularly with little hassle.
Many retirement plans allow you to increase your savings by 1% per year automatically. This is called scaling up your savings, and it can be an effective way to grow your savings by starting small.
3. Set Aside Your Savings First
Many experts recommend that you set aside your savings first or set aside money to save when income comes in rather than waiting to see what is left over. Review your budget to determine how much you can save, and consider saving as much as possible. Take into account your daily expenses and your debts. Try to save 10 to 20 percent of your income and use direct deposit or make a transfer to your account for retirement.
4. Save as Soon as You Start Earning
If your employer offers a sponsored retirement plan such as a government 401(k), 403(b), or 457(b) plan, enroll and make an input from each salary. An additional benefit of participating is that many employers offer matching contributions to what you are saving. This can provide a significant boost to your savings.
Many contributions to company retirement plans are tax-deferred, which means you don't pay taxes when you contribute to your account. If your employer matches all or a portion of your contributions, take full advantage of that opportunity by depositing funds equal to at least the match amount. Study your company's plan. Talk to your HR department if you have a question about your employer-sponsored plan.
In addition to your company-sponsored plan, you can contribute to an IRA as long as you have earned income. A traditional Individual Retirement Account offers tax-deferred growth potential. You don't pay taxes on any earnings from investments until you distribute or withdraw the money from your bank account, presumably during retirement. With a Roth IRA, taxes on your contributions are not deferred, but you may not have to pay taxes on distributions in retirement if certain conditions are met.
5. Consider Your Priorities and the Possibility of Compromising
You may decide between paying off your loans more quickly or putting money into savings and investments. If you have low-interest student loans, you'll probably earn more by prioritizing your savings and investments. However, if you have high-interest credit card debt, it's probably to your financial advantage to pay off your debt first and then focus on saving and investing. Remember, however, that many people will have some form of debt for most of their lives. If you keep putting off saving until you pay off all your debt, you may never start saving the money you need for retirement.
6. Do Your Research
In the years ahead, it's essential to be well-informed whether you manage your investments independently or with an investment professional. Be proactive and learn as much as you can about investing from the Internet, books, magazines, and other sources of information. Consider your risk tolerance when deciding between conservative (lower risk, lower potential return) and more aggressive (higher risk, higher possible return) investment options.
A trusted tax advisor can help you make the best decisions for your retirement. Schedule a consultation today and learn how we can help you navigate retirement.