3 Strikes to Avoid When Tax Planning
- October 24, 2022
- Financial Planning, Taxes & Tax Planning
Taxes are among the most common concern for people in retirement. You might be wondering how to start thinking about your tax strategy so you aren’t taxed more than you need to be. A comprehensive tax strategy can help to avoid these three common mistakes.
Taking Too Much Income
When you start to approach retirement, you’ll have to start thinking about transitioning from the wealth accumulation stage to the income stage of your life. The whole point of saving for retirement is to live comfortably off your savings in retirement. But asking your money to provide you income is a different question than asking it to grow.
Make sure you know as best as you can exactly what your expenses will be in retirement. Think of it this way: There is no point in providing yourself extra taxable income with the money you already saved if all it will do is get taxed and then go back into your savings.
This is especially important if you are worried about moving into a higher tax bracket due to your income levels. So, make sure your income is strategized so that you have what you need in any given year and won’t see extra income from mistiming your multiple income sources.
Misusing Retirement Accounts
Retirement accounts are a crucial piece of your retirement puzzle. But each one differs slightly and may have different benefits and limitations. It’s important to know how each retirement account is structured so you don’t end up paying penalties and fees missing out on any tax-advantaged perks of these accounts.
For starters, make sure you know the differences between a Roth IRA and a Traditional IRA. Also, consider how to take control of your 401(k) or other employer-sponsored plans. 401(k)s are offered by your employer, and although they often come with contribution matching benefits and other tax perks, they sometimes offer less flexibility with investment choices, which can affect both performance and your investment costs.
Not Factoring in Social Security
Social security is potentially taxed! But it’s not all taxed at the same rate. In fact, your Social Security tax rates are based on the amounts of other income you receive in retirement. Up to 85% of your Social Security payments are subject to regular income tax rates based on the levels of your other income. So, make sure your Social Security and retirement account income plans are lined up so you can claim your maximum benefit with minimal taxation.
Don’t just wait until tax season to figure out your tax plan. Taxes affect your whole retirement so factor them into your wealth preservation and income plan too. We can help you build a comprehensive retirement plan that considers your unique financial situation.