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Retire Early
Lifestyle
Retirement; like your parents, but way cooler
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In 1991 Billy and Akaisha Kaderli retired at the age
of 38. Now, into their 4th decade of this
financially independent lifestyle, they invite you
to take advantage of their wisdom and experience. |
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Want to
Keep More of Your Money in Retirement?
Five Smart Strategies for
Reducing Tax Burdens
Christophe Garcia
As
retirement gets closer and closer, one of the biggest questions many people have
is: how can I keep more of my hard-earned money? Taxes don’t go away when the
paychecks stop, and if you’re not careful, Uncle Sam can take a sizable portion
of your retirement income. Thankfully, there are ways to reduce tax burdens, and
by planning strategically, you can keep more of your money where it belongs—with
you. Let's explore the smart strategies people use to reduce retirement tax
burdens and maximize your income.
New Technology for Retirement: The Digital Tools That Keep You on Track
Nowadays many retirees are tapping into
new technology for retirement to ensure
their golden years stay financially secure. This tech includes sophisticated
planning tools that analyze current assets, forecast expenses, and simulate tax
scenarios. Some platforms even allow users to create tax-efficient withdrawal
plans, so you can identify which accounts to draw from first to reduce taxable
income. With digital platforms and AI-powered tools, retirees are finding it
easier than ever to create comprehensive, tax-efficient plans tailored to their
unique situations.
These new technologies help track retirement milestones, calculate income needs,
and predict future expenses based on health and lifestyle. What’s more, they
offer access to a wealth of data to make smarter decisions about retirement
savings, investment income, and withdrawals.
Understanding IRMAA Brackets: Keep More by Managing Your Medicare Premiums
If
you’re a high-income retiree, Medicare isn’t just a straightforward expense;
it’s one where your income matters.
IRMAA brackets—or Income-Related Monthly
Adjustment Amounts—are additional Medicare premiums for those with higher
incomes, potentially adding a lot of money to your monthly healthcare costs. If
you’re not careful, a few thousand dollars in extra income can place you in a
higher bracket, significantly increasing your out-of-pocket expenses for
Medicare.
To
avoid or manage IRMAA surcharges, retirees need a thoughtful approach to taxable
income. This can include strategies like carefully managing retirement account
withdrawals, strategically timing Social Security benefits, or using Roth
conversions during low-income years to reduce future required minimum
distributions (RMDs). With a well-executed tax plan, you can potentially stay
below certain IRMAA thresholds, saving money on Medicare premiums and keeping
more of your retirement income intact.
Leveraging Roth Accounts: Tax-Free Withdrawals in Retirement
For
those looking to minimize taxes on retirement income, Roth IRAs and Roth 401(k)s
can be invaluable. Unlike traditional retirement accounts, Roth accounts allow
for tax-free withdrawals in retirement, since contributions were taxed upfront.
This can be a game-changer when managing tax burdens, as every dollar withdrawn
from a Roth account won’t increase your taxable income.
By
withdrawing strategically from both traditional and Roth accounts, you can
manage income levels more effectively, potentially lowering overall tax
liability. Converting some funds from traditional accounts to Roth accounts
during lower-income years can also be a smart move. The upfront tax cost may be
worth it in the long run, allowing you to enjoy tax-free growth and withdrawals
when you need them most.
Timing Social Security: Maximize Benefits While Minimizing Taxes
Timing is everything when it comes to Social Security. The age at which you
start claiming benefits not only affects the amount you receive but can also
impact your tax situation. Delaying Social Security until full retirement age or
even age 70 can maximize your monthly benefit, and in some cases, it may also
help you manage your taxable income more effectively.
Here’s how it works: by delaying Social Security, you may avoid having to
take significant withdrawals from retirement accounts early on, which could keep
you in a lower tax bracket. For instance, you could spend down taxable accounts
first, allowing retirement accounts to continue growing tax-deferred. This
approach can help you defer or reduce RMDs later in retirement, thereby lowering
your taxable income and keeping more of your money.
Managing Investment Income: Tax-Efficient Withdrawals and Asset Location
Investment income can be a major source of cash flow in retirement, but it can
also lead to high tax burdens if not managed correctly. One way to control the
tax impact of investment income is through careful asset location—placing
certain types of investments in tax-advantaged accounts and others in taxable
accounts.
This way, income from more tax-efficient investments, like qualified dividends
or long-term capital gains, can be realized in taxable accounts. Income from
bonds or high-dividend stocks can then be sheltered in tax-deferred accounts.
Another aspect of managing investment income is the
timing of capital gains. For
instance, realizing gains in low-income years or harvesting losses in
high-income years can help balance your taxable income. By staying mindful of
where your assets are held and when you recognize income, you can keep tax
burdens lower and enjoy more income in retirement.
About the Authors
Retire
Early Lifestyle appeals to a different
kind of person – the person who prizes their
independence, values their time, and who doesn’t
want to mindlessly follow the crowd.
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