Retirement is a whole new phase of life. You’ll experience many new things, and you’ll leave other things behind. One thing that won’t disappear, however, are taxes. If you’ve followed the advice of retirement plan consultants, you’re probably saving in tax-advantaged retirement accounts, like 401(k)s or IRAs. These types of accounts defer taxes until withdrawal, and you’ll probably be withdrawing funds from them in retirement. Also, you may have to pay taxes on other types of income, like Social Security, pension payments, or salary from a part-time job. With that in mind, it makes sense for you to develop a retirement income strategy. Here are three tips:
1. Consider when to start taking Social Security.
The longer you wait to start taking your benefits (up to age 70), the greater your benefits will be. Remember, though, that currently up to 85 percent of your Social Security income is considered taxable if your income is over $34,000 each year.
2. Be cognizant of what tax bracket you fall into.
You may be in a lower tax bracket in retirement, so you’ll want to monitor your income levels (Social Security, pensions, annuity payments) and any withdrawals to make sure you don’t take out so much that you get bumped into a higher bracket.
3. Think about your withdrawal sequence.
Generally speaking, you should take withdrawals in the following order:
- Required minimum distributions (RMDs) from retirement accounts. You’re required to take these, so start here first.
- Taxable accounts. You should use these up.
Remember:
- If you sell investments, you’ll need to pay taxes on any capital gains.
- Tax-exempt retirement accounts like Roth IRAs or 401(k)s.
- Saving Roth accounts for last makes sense.
- You can take withdrawals without tax penalties, for example for a large medical bill. You can also use them for estate planning, since your heirs won’t pay any taxes on their distributions, either.
All these factors are complex, and you may want to consult a tax professional to help you apply these tips to your own financial situation. You can test different strategies and see which ones can help you minimize the taxes you’ll pay on your savings and benefits.