If you are approaching retirement, there are several things to consider in regards to the amount of tax, deductions, and income you will incur from accounts you’ve contributed to during your career. It’s important to understand the amount of your income that will be taxable and what your tax rate will be after you retire. Even with lower tax rates currently applied to retirement income, there are strategies that can help you maximize your income and reduce taxes.
Four accounts that have unique tax advantages you can access any time while still working are: Roth 401(k) & Roth IRAs, taxable accounts, tax-deferred accounts, and health savings accounts.
Roth accounts provide the benefit that they will not incur any additional taxes when withdrawn in retirement because you already would’ve contributed a value after taxes were taken. A way you can avoid the required minimum distribution that applies to a Roth 401(k) is by rolling it over to a Roth IRA once retired.
Taxable accounts are taxable income investment accounts through a traditional bank and brokerage account. This means that income tax is taken out in the year it is earned. There are situations where these can be used to offset capital gains or as an investment for a loss and are exempt from required minimum distributions.
Tax-deferred accounts include 401(k)s, 403(b)s, and traditional IRAs that you contribute to pre-retirement and advantageously reduce your taxable income in the year you made the contribution. These contributions and gains aren’t usually taxed until retirement and do then incur traditional income tax rates. However, it is important to consider that these accounts require minimum distributions to be taken after the age of 72.
Lastly, Health savings accounts (HSA) you’ve contributed to offered by your employer can be utilized as an effective savings account. These contributions and investments grow tax-free, can reduce your taxable income to a limit, and don’t incur tax when withdrawn for qualified medical expenses. HSAs are exempt from required minimum distributions.
By knowing the different accounts available to you, make informed decisions on the diversification and combination of accounts you choose to have your money available in. Consulting with a tax professional as you approach the age for retirement should also be highly considered. Waiting until the last minute might cause you to pay more taxes than you thought.