These Tax-Planning Tips Could Save You Big in Retirement

By Alan Olsen
These Tax-Planning Tips Could Save You Big in Retirement

Is retirement on your radar? If it is then planning for taxes in retirement should be, too. Retirement often presents unexpected financial challenges. That’s why it’sso important to plan ahead. There are many steps to take when planning for retirement. Meeting with an experienced tax accountant and/or a financial planner is a smart move if you’re getting ready to retire.

The Perfect Time to Switch

One great way to help your financial situation in retirement is to convert your traditional IRA or 401(k) to a Roth IRA. But it’s not for everyone, so there are some things to be aware of before you do it. There is a time for most people between when they retire and when they start taking the required minimum distributions from their 401(k). It’s during this time that you can take advantage of this conversion. But always be sure any move you make lines up with your overall financial objectives in retirement.

Tax-Free Distributions With Roth

So here’s what you do if you want to transfer to a Roth IRA and why it can be beneficial. First off, traditional retirement accounts, including 401(k) plans, come with taxes when you withdraw the money. You do get to contribute to them tax-free, but eventually the taxman gets his share. The beauty of a Roth IRA is that your distributions are tax-free. That’s because the money you contribute to a Roth has already been taxed. Additionally, the money you contribute to a Roth IRA typically comes when you are in a lower tax bracket.

Will You End Up in a Higher Tax Bracket?

If you leave the money in a traditional IRA, by the time you start withdrawing it, that extra income could push you into a higher tax bracket. That means you would have to pay a higher percentage onthe money you withdraw. If you haven’t planned for this additional tax bill then it could throw off your entire retirement finances.

No Required Minimum Distribution

Another nice thing about a Roth IRA is that there is no required minimum distribution. In fact, you can just leave the money untouched for the rest of your life. Some people do this and then pass the assets onto their heirs when they die. It’s a great way to take care of your family after you’re gone. And guess what? Your heirs get to withdraw the money tax-free, as well (in most cases). In addition,you can covert your traditional IRA to a Roth over an extended time-period. This helps prevent you from jumping into a higher tax bracket. It also helps you avoid a big tax sting, which would happen all at once if you convert all your assets at the same time.

Two More Things to Know

The main thing to keep in mind when converting from a traditional IRA to a Roth is making sure you have enough cash at your disposal to pay the taxes that will be due when you convert. Lastly, you also typically have to wait five years before you can withdraw form a Roth completely tax-free. So there you have it. Converting to a Roth makes a lot of sense for a lot of people heading towards retirement.