Retirement Tips You Can't Miss: Tax Planning for Retirement

Transcript

Hello, and welcome to Fisher Investments' Retirement Tips You Can't Miss. A series designed to help retirees enjoy the comfortable retirement they've worked so hard for without worrying about how to make their money last. Today, we're talking about a topic that's essential for retirees: tax planning for retirement. Understanding the potential tax implications of investment choices in retirement can help you plan accordingly. Let's dive in. Investors saving for retirement can choose from three primary types of investment vehicles taxable accounts, tax-deferred accounts, and tax-free accounts. Each of these account types has pros and cons. Pretax or tax-deferred accounts, such as 401Ks and IRAs, are the most common type of retirement account. These are called pretax accounts because contributions are not taxed until funds are withdrawn in a future tax year. Withdrawals, also called distributions, are typically taxed as ordinary income. When saving for retirement in a pretax account, it's worth considering the potential growth in the account over time. That's because required minimum distributions, or RMDs, can potentially cause tax issues in retirement for investors with large pretax account balances. RMDs begin at about 4% of your-end-of year account value and gradually increase over time. It's not uncommon to see investors with large pretax accounts ending up with RMDs that exceed their income needs. These investors can end up paying income tax on money they don't need, which can also impact their Medicare premiums and taxes on Social Security income. With pretax accounts, you'll also want to watch out for early withdrawal penalties. You can be assessed a penalty if you withdraw funds from your IRA or 401K before you've reached a certain age. When planning contributions to pretax accounts, it's important to carefully think about when and how much you may need to withdraw in retirement. Less common, but still a valuable retirement savings tool for many investors are tax-exempt accounts, such as Roth IRAs. These accounts are called tax-exempt because withdrawals are generally tax free if certain conditions are met. Keep in mind, that contributions to these accounts are after tax and not tax deductible. As with taxdeferred accounts, you can be assessed an early withdrawal penalty if you take money out of a tax-exempt account, like a Roth IRA, too soon. After-tax accounts such as brokerage accounts are the final type of retirement account we'll cover today. These accounts are common among high earners who have already maxed out other retirement savings options. Investors have typically paid income taxes on the money they put into after-tax accounts. Taxes are also paid annually on most dividends and interest from these investments. You'll also need to pay capital gains on the sale of investments in these accounts, and there are no early withdrawal penalties. When planning where to put your retirement savings, it's helpful to think about your potential future income and expenses. For example, if you anticipate living comfortably on only your Social Security or pension income in retirement, you may want to limit your pretax contributions to reduce future RMDs. If you're currently in a higher income tax bracket than you expect to be in the future, you may want to maximize your pretax contributions now. Finally, you'll want to be aware of tax laws and potential changes to these laws. Legislation can make temporary or permanent changes to tax laws, and nearly all tax laws are subject to change if new legislation is passed, your tax strategy for retirement is not set in stone. It's important to regularly review your finances, tax situation and savings to make sure you are on track and adjust your plan as needed over time. For more resources and insights, visit Fisher Investments. For more resources and insights, visit FisherInvestments.com. Thanks for watching, and don't forget to 'Like' and 'Subscribe!'