Puzzle Piece #3

Retirement Puzzle Piece #3

Taxes in Retirement and Beyond

Learning Video: Taxes in Retirement and Beyond Part 2

Tax Efficiency

Tax-efficient withdrawals incorporated into your investment strategies will enable you to withdrawal less from your assets and achieve a similar net income result. This enables unused assets to accumulate longer and untouched.

The tax impact of which assets you elect to tap into and withdraw funds from first; and the timing of withdrawals, could make a huge difference in the amount of overall net income taken during your retirement and left over for your beneficiaries after you’re gone.

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Tax Qualified Plans

According to a new study by Investment Company Research: 71% of U.S. households have some sort of tax-deferred retirement plan. So this study suggests that it’s quite likely that you have saved money for retirement in a traditional IRA or in an employer-sponsored plan such as a 401(k), 403(b), 457 plan, or some other retirement account that defers taxes.

Over time, it’s natural for you to want and expect your retirement savings to grow. But as your savings in these types of qualified plans grow, so does the associated tax burden. That’s because taxes on that money is deferred, not eliminated.

And who pays these taxes? You will, when you take withdrawals — and your beneficiaries will, when they receive the balance that remains at your death. In simple terms: As your balance grows, so do the deferred taxes.

But what most people really want is for their savings to grow and the associated tax burden to not grow.

So, how do you grow your retirement savings while not growing the deferred tax burden? One tax-efficient answer is by doing a Roth IRA conversion today.

Roth Conversion

A Roth IRA conversion is one of the simplest, best planning tools available, especially if you want to leave retirement assets to family or friends.

A Roth conversion basically entails paying taxes on your accumulated IRA or 401k balance now, thereby stopping the tax burden from continuing to grow. That’s because once the money is in a Roth IRA, you will owe no taxes on any future growth of the Roth.

Also with a Roth you avoid the requirement that you have with regular IRA’s and 401ks. The requirement that you must take yearly minimum distributions starting at age 70 ½. With a Roth, you can leave more for your beneficiaries if you don’t need the money yourself. And with a Roth, no tax is assessed when the money is withdrawn by your beneficiaries, which they can do over their lifetimes.

Another benefit, and in contrast to traditional IRAs whose withdrawals are generally fully taxable, Roth IRAs can provide a cash flow in retirement that’s 100% free of income taxes.

Future interest and investment gains are not taxed at all, as long as the rules are followed. And, in general, the two rules are — #1: no withdrawals from a Roth IRA prior to age 59½ without an IRS 10% penalty, and #2: no withdrawals until the Roth account has been established for at least five years unless you want to pay a penalty.

When is a Roth Conversion a good idea?

If you think that income tax rates are going to increase in the future, then paying taxes now on your conversion would make sense in order to prevent paying higher taxes in the future.

If you don’t know what your future tax rates will be – then having some money in a Roth IRA and some in a traditional IRA offers you what some experts are calling “tax diversification.”

A Roth Conversion is a good idea if you can pay the taxes on the conversion by taking funds from a taxable account. By not pulling money out of your qualified plans to pay taxes, you will increase your after-tax purchasing power in retirement.

A Roth IRA can be good if you like the idea that no RMDs are required from the Roth while you are alive.

A Roth IRA can be good if you like the idea that when your beneficiaries inherit it, they will not owe any income taxes on it. And they can stretch Roth with continued tax-free growth over their lifetimes.

The many ways your Qualified Plan may be Broken

A major mistake made by people in or near retirement is not understanding all the tax rules that affect your investments in retirement and especially your Qualified Retirement Plans such as IRAs, 401(k)s & Pensions.

This is an area of retirement that has huge potential for error. To ignore or mishandle tax issues in retirement can severely impact your nest egg and end up making the IRS your #1 Beneficiary. So let’s look at some of the ways that your Qualified Retirement Plan is broken.

10 Signs Your Qualified Retirement Plan is Broken

  1. Your money is still in a Qualified Retirement Plan (QRP) at an employer that you no longer work for. (401k, 403b, 457, TSP, etc.)
  2. You’re not taking advantage of “In-Service Distribution Rule” for 401(k)s
  3. You’re not taking advantage of Stretch IRAs and Stretch Roth IRAs.
  4. You are not familiar with the many unforgiving tax traps associated with QRP distributions                         and neither are your beneficiaries.
  5. You have improper or no designated beneficiaries
  6. You’re using a Will or improper Trust to establish beneficiaries
  7. You have too much of your QRP at risk in today’s market
  8. You are still paying commissions, fees and expenses on your QRP
  9. Your Custodian won’t let your QRP stretch when allowed by IRS rules.
  10. Your current advisor is not an QRP distribution specialist

Multi-Generational Stretch IRAs and Stretch Roth IRAs

First, the term “stretch,” does not refer to a specific type of IRA. Instead the term is used to describe a financial strategy in which a spouse, child or grandchild inherits a traditional, pre-tax IRA and then draws out distributions (and hence tax deferral) over his or her own life expectancy.

Remember, with a traditional IRA, the money is taxed as it is taken out of the IRA wrapper; whether by the account owner or by the beneficiaries. So, stretching out the IRA gives the money extra years–potentially decades–to enjoy compound growth and tax-deferral. And that’s a powerful investment concept.

Choosing a Multi Generation IRA rather than a lump sum distribution can mean a legacy of lifetime income for your spouse, children, and grandchildren.

It brings you the peace of mind knowing years of saving will not be depleted by the IRS.

How to Assemble the Retirement Puzzle for Financial Peace of Mind