Retirement planners like Robert Nico Martinelli and others say that taxes and inflation are the two biggest risks to your retirement. Here are some tax-smart strategies to save more for retirement.
1) Make the Most of Your 401(k)
Your 401(k) should be a key part of your retirement plan during your working years since the money you contribute is deducted from your paycheck before tax. The contributions are also tax-deferred, so it reduces how much tax you have to pay as well.
If you change jobs during your career or lose one, ask about transferring the account to a limited liability company (LLC), a self-directed IRA, or a new employer’s 401(k). These options have no mandatory withdrawal rules upon reaching age 70 ½.
2) Save More Now
The maximum you can contribute to your traditional or Roth IRA is $5,500 per year as of 2021 ($6,500 if you are 50 years old and older but I wouldn’t wait until 55 as some planners suggest because the time value of money will lessen the benefit relative to making an additional contribution in subsequent years). The limits may not seem like much when you think about how much income needs to be saved for retirement after taxes are factored in. But don’t forget that there are also other types of retirement accounts available, so plan accordingly. For example, if you are over 50 years old, you can contribute an extra $1,000 to a traditional or Roth IRA.
3) Use Trusts to Reduce Taxes
A trust can be used to reduce taxes for retirement since trusts are typically taxed at lower rates than the earnings you make on your savings. Trusts are created by a settlor who places certain property or money into the trust until it is passed onto beneficiaries upon the settlor’s death. A revocable living trust allows you to retain control of your assets while alive but transfer full control of your asset(s) to beneficiaries after death. Talk with your wealth planner about other types of trusts that may help save more for retirement.
4) Roth IRA Conversion Ladder
With a Roth IRA conversion ladder, different taxable brokerage accounts are converted to Roth IRA accounts every year so that income tax liability will not take place until an individual is in a lower tax bracket. The Roth IRA conversion ladder provides a five-year window to avoid the higher ordinary income rates that could be as high as 39.6%. Also, this strategy allows you to convert traditional IRA accounts into Roth IRAs each year and then wait until the following year’s income tax filing deadline to file your return.
5) Consider an Employer Retirement Plan
Before considering individual retirement account (IRA), consider if your employer has a 401(k) or similar plan with an employer match program. Many companies offer matching funds on the first 3% of contributions toward their retirement benefits for employees who elect not to contribute by deferring compensation elsewhere. It’s free money; don’t leave it on the table!
6) Diversify Your Income and Investments
Diversifying your income and investments is a must for retirement planning. Determine the minimum amount of savings needed to produce 5% to 7% per year by reviewing articles on annual withdrawal rates. This will verify how much money you need to save in order to sustain your current lifestyle during retirement years.