Tax Smart Planning

7 'Tax-Smart' Retirement Withdrawal Strategies

For many, retirement is the phase of life to kick back, relax, and enjoy the fruits of years of working and saving. However, financial decisions before and during retirement can significantly influence our quality of life and tax liability. Therefore, employing tax-smart retirement withdrawal strategies may help you maximize your retirement nest egg.

Here are seven tax-smart retirement withdrawal strategies to help mitigate your tax burden and help you maintain financial confidence throughout retirement:

1. Tap into your non-retirement accounts first. Withdrawing money from your non-retirement accounts may make sense earlier in retirement. Why? The IRS doesn't tax the principal balance you contributed to these accounts. You will only have to pay taxes on dividends and capital gains. Plus, delaying withdrawals from tax-deferred retirement accounts gives your money more time to grow.

2. Utilize a Roth IRA Conversion. Converting a traditional IRA to a Roth IRA may help mitigate your tax liability in retirement. However, you'll have to pay taxes on the converted amount during the conversion year, but the money in your Roth IRA will continue to grow and can later be withdrawn tax-free.

3. Consider Qualified Charitable Distributions (QCDs). If you are 72 years old or older and have an individual retirement account (IRA), you can directly transfer a certain amount of your annual required minimum distributions (RMD) to charity without incurring taxes on the donation. Using this QCD strategy, you satisfy your RMD without increasing your taxable income.

4. Manage capital gains. Typically, long-term capital gains have lower tax rates than ordinary income. So, consider selling investments in appreciated taxable accounts. Managing these investments for capital gains and taxes may provide income while incurring lower taxes.

5. Time Social Security benefits. The timing of claiming your Social Security retirement benefits could significantly affect your taxable income in retirement. Consider delaying your social security benefits if your other income sources are enough to cover your monthly expenses. This way, you will delay taxes on your Social Security benefits until later when you take them.

6. Explore tax-efficient investments. Lowering your taxable income in retirement may involve placing investments into your portfolio that generally produce lower taxable distributions—for example, investing in tax-managed funds or index funds. A financial professional can help you determine which tax-efficient investments are appropriate for your situation.

7. Contribute to a Health Savings Account (HSA). HSAs offer three tax advantages: contributions are tax-deductible, the money grows tax-free, and withdrawals for eligible medical expenses are also tax-free. Contributing to an HSA during your working years and using the funds to cover healthcare costs in retirement can provide significant tax savings.

There you have it, the low down on tax-smart retirement withdrawal strategies. Because your financial situation is unique, consider visiting with financial and tax professionals to determine which retirement withdrawal strategies are appropriate for you.