Walker Capital helps plan for lower retirement taxes
Most of a federal employee’s retirement income comes from one of three sources: Social Security benefits, retirement savings like the TSP or Individual Retirement Accounts (IRA), and a CSRS or FERS pension. . Depending on their income level, people use different strategies to minimize their tax burden in retirement. Walker Capital Preservation Group can help clients of all income levels develop and implement tax strategies that will work for them.
Get help with tax diversification
Tax diversification helps those planning for retirement create the flexibility to control their tax rate in retirement by providing different options for taxing distributions. There are three types of investment and savings accounts, and each of them offers a different approach to taxation.
Tax-deferred accounts allow holders to delay paying taxes on their investment earnings, but withdrawals made after retirement will be taxed at regular rates (contributions and earnings).
Tax-free accounts require paying taxes on the money put into the account, but offer tax-free retirement withdrawals as long as certain basic guidelines are followed.
Taxable accounts, such as brokerage accounts, are called non-qualifying accounts because they do not receive preferential tax treatment. Unqualified accounts are required to pay capital gains taxes which are calculated for each transaction (sale of a share, etc.). Capital gains tax rates are generally lower than income tax rates, but require the asset to be held for more than a year – otherwise, they are valued at short-term capital gains rates (which are the same as the normal tax rates). The fact that taxes regularly interrupt the ability of these accounts to compose themselves means that taxes create a drag on the performance of the account.
Choosing the right retirement accounts
There are many types of tax advantageous retirement accounts for long-term savers. Popular options include:
Each of these types of accounts is subject to different forms of taxation. IRAs also have an earned salary limit for contributions, which employer-sponsored plans like the TSP do not have. IRAs and TSPs both have a maximum contribution limit, but contributions to an IRA (or Roth IRA) do not impact your contributions to the TSP. Walker Capital can offer personalized advice on the types of retirement accounts that will provide the best benefits over the long term.
Understand the minimum required distributions
Minimum required distributions (RMD) apply to most retirement savings accounts, including traditional IRAs and 401 (k) s. The system forces savers to start withdrawing certain amounts of their money each year after reaching the age of 72. Failure to meet an RMD may result in a 50% penalty on the entire portion of the RMD that has not been withdrawn by the deadline.
Unfortunately, the system that governs RMDs is quite complex, and if these distributions are not managed properly, it could create an increase in the taxable income of the retiree which would put them in a higher tax bracket. It is always worth consulting with a retirement planning and tax expert to develop a plan for RMD.
Proactive planning maximizes gains
Since workers are expected to contribute to their retirement accounts over the course of their careers, it makes little sense to wait until they leave the workforce to determine how retirement taxes work and their impact on income. Being more proactive in planning allows workers to meet their target retirement goals without worrying about excessive taxes reducing their quality of life. Instead of waiting until retirement is imminent, visit https://walkercpg.com/ to learn more about early retirement tax strategies.
Schedule a consultation today
Want to plan for a more satisfying retirement that doesn’t involve paying too much federal and state taxes? Tom Walker is a nationally recognized retirement planning expert with years of experience helping clients plan for financial independence for retirement. We invite federal employees, business owners, and individuals concerned about their tax liability in retirement to visit https://walkercpg.com/contact/ and complete a contact form to request more information.