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Tax-Efficient Retirement Income Strategies

When you're preparing for retirement, one of the most important dynamics is ensuring you avoid hefty taxes on the lifelong investments you've been cultivating for this exact moment. Your retirement income is intended to last for the remainder of your life, and having a substantial amount wiped out by taxes can be devastating.

Luckily, there are ways to navigate taxes on retirement income to ensure you walk away with the maximum amount for your golden years. The following article outlines some of the most tax-efficient retirement income strategies and ways to prepare yourself better.

<b>How Can I Avoid Paying Taxes on Retirement Income?</b>

How Can I Avoid Paying Taxes on Retirement Income?

Correctly prepare your Roth IRA accounts to avoid federal taxes on retirement income. Converting your traditional IRA money to a Roth IRA can have significant tax consequences.

However, there are a few ways to prevent yourself from losing money during the conversion. Converting your IRA accounts has the following benefits:

  • Distributions in retirement will be completely tax-free.
  • This also lowers your overall income, protecting your Social Security benefits from taxation as well.
  • Roth IRAs don't include required minimum distributions or RMDs.

Avoiding Taxes on Roth IRA Conversions

The best way to avoid losing money to taxes during a Roth IRA conversion is by rolling your IRA accounts into your 401k. Afterward, convert non-deductible contributions to the IRA moving forward. You can also use your life insurance to create more tax-efficient income for retirement.

<b>Life Insurance Strategies</b>

Life Insurance Strategies

Instead of drawing income from investments that are fully taxed, you can integrate your cash-value life insurance into the mix. Use tax-free loans or withdrawals from your life insurance to supplement your retirement income. Wealth preservation through subsequent generations can also potentially become tax-free as well.

Estate Planning

Without the proper strategy, federal taxes on retirement income could eat away at any inheritance you plan on leaving your children. What's the smartest thing you can do if you plan on leaving more than $250,000 in assets? Consider setting a trust.

This money won't be subject to taxes, although you'll need a trusted family member to act as the trustee since they'll ultimately control it. On the plus side, money can be distributed from a trust while you're still alive.

You may also choose to set up a non-taxable charitable remainder trust. This will provide beneficiaries named by the donor with the assets first and disperse the rest to a charity of the donor's choice. It's important to note that the assets can be in the form of stocks or real estate.

Using tax harvesting is another wise move to avoid federal taxation on your retirement income.

Tax Harvesting

Tax harvesting is a complicated process, and you will ideally meet with your financial advisor before making any serious moves. However, the process entails selling long-held securities at a loss to offset short-term capital gains.

Avoiding taxes on retirement income may also be accomplished by arranging a tax-efficient portfolio and making strategic withdrawals at the right times.

<b>Tax-Efficient Portfolios and Strategic Withdrawals</b>

Tax-Efficient Portfolios and Strategic Withdrawals

It's important to set up your portfolio and make strategic withdrawals to avoid federal taxes on retirement income. Here are two examples:

  • Consider spreading out your taxable income more evenly throughout retirement. Use a proportionate strategy instead of starting with taxable, then traditional, and finally Roth income.
  • Take your capital gains when you are in a lower tax bracket. Single filers with taxable income less than $40,400 are in the two lower tax brackets, meaning 0% owed on capital gains.

When building your portfolio, you should also consider making tax-free investments and planning for the long term.

Tax-Free Investments for the Long Term

Consider the following tax-free investments in long-term portfolio planning:

  • Municipal bonds
  • Tax-exempt mutual funds
  • Indexed Universal Life Insurance
  • Health Savings Accounts
  • Roth IRAs and 401ks

When you understand all of these strategies, you can save yourself substantial taxes on retirement income. But, what's the best place to keep your retirement money?

Safest Place to Keep Retirement Funds

Store your withdrawn assets in a normal savings account at your bank. This is the safest place to store any retirement funds. However, if you plan on reinvesting any of the funds, consider placing them in the following locations:

  • Annuities
  • Mutual funds
  • Tax-free bonds

These are the safest tax-free locations for your assets in retirement. The most important concern is how much you'll end up paying in taxes upon retirement.

How Much Will I Owe on Federal Income Taxes in Retirement?

Assuming you play your cards right, it's possible you could only have to pay taxes on your pension and Social Security. Before retirement, you can ask that taxes be withheld from your pension to offset these charges in retirement.

As far as your Social Security, this depends on what you've shown as your taxable income. The window of taxation on Social Security is anywhere from 0 to 85%. By making the right moves and following the advice in this article, you should be able to keep yourself on the lower end of Social Security taxation.

Navigating the ins and outs of creating tax-efficient retirement income can be a difficult and confusing process. It’s best to work with an experienced financial advisor who is versed in the many options available to you. Give Retirement CFO a call today to get started!

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