Whether you are on the verge of retirement or just in your early 20s, you can’t evade taxes. Smart tax planning can help you meet your financial obligations both before and after retirement.
Once you’re retired, you no longer contribute to a tax-deferred retirement savings plan. Instead, you have to tap into your retirement savings for regular income and payment of taxes. So here are 8 smart tax-saving tips that can help you in saving money for retirement:
Use Retirement Funds Wisely
The most important decision people make post-retirement is how to use and invest the savings accumulated in their 401(k) account, or other such retirement plans of their employer. If you have more than $5,000 in your retirement fund until the age of 65 years, it can stay with your employer if you want. However, you can access your 401(k) savings if you are at least 55 years old by the time you leave your job, but it will incur income taxes.
Transfer Your Retirement Fund to an IRA
You can transfer the money into an IRA without any penalties, if you are at least 59 ½ years old. Once you roll over the money into an IRA, you have ample investment options. Maintain the tax deferral by transferring your funds to a broker, life insurance or mutual fund company. Make sure the fund is transferred through a check to your IRA account to avoid penalties. In case the check is written to your other account, it will require the employer to withhold 20% balance for the tax payment.
Save Taxes Through Your Company Stock
You can save taxes through your company stock by using net unrealized appreciation (NUA) value, which is the appreciation of the stock in a retirement plan. Transfer your company stock in a taxable account to pay taxes only for the stock. You won’t be incurring taxes on NUA unless the stock is sold. The profit is eligible for a favorable long-term capital gain rate.
Save Taxes in Distributions
Start withdrawing the traditional IRA or 401(k) fund by April 1 the following year, when you have reached your retirement age. In case you fail to withdraw your full required minimum distribution (RMD), you will have to pay a 50% penalty. You can consider taking out more than the minimum required amount and then pay regular taxes on the rest of the amount. You can also file quarterly estimated tax payments.
There is no condition of mandatory distribution with Roth IRAs. You can withdraw money from your Roth IRA tax-free if you are at least 59 ½ years of age and have the account open for minimum five years.
However, Roth 401 (k) has mandatory distribution rules. If you roll over the money of your Roth 401 (k) into Roth IRA, you won’t need to pay taxes.
Convert to Roth for Tax-Free Withdrawals
You can easily convert your traditional IRA or 401 (k) to a Roth IRA without any income limit. You will need to pay taxes on the converted money to enjoy tax-free withdrawals.
Delay Social Security Benefits
Save tax by delaying social security benefits after retirement. It will add 8% credit every year. The benefits claimed at the age of 70 will be 32% higher than that claimed at the age of 66.
Earn Tax-free Annuities
Buy annuities with funds outside your retirement account to receive partially tax-free payments. The return on the investment part of your payment qualifies as tax-free, while the investment earnings part qualifies as taxable. Get a 1099-R from your insurance company to assess the complete taxable payment.
Avail Tax-Free Medical Expenses from Your HSA
The medical expenses covered by your Health Savings Account (HSA) are tax-free. If you avail non-medical benefits under 65 years of age from your HAS, you’ll need to pay a 20% penalty. However, after 65 years, you will incur taxes on non-medical expenses.