If you’re preparing for retirement, there are potential savings you should consider with your withdrawals.
With just a few key moves, you could maximize your money and gain significant savings when it comes time to withdraw money in retirement.
Here are a couple of the moves that pay off the most for retirees:
Diversify for better retirement withdrawals
A diversified retirement portfolio is resilient. It gives you wiggle room to move money when it makes sense, and not pay more than you need to in taxes.
A balance of pre-tax, after-tax and taxable money can help quite a bit in retirement.
Here’s a quick breakdown of those accounts:
- Pre-tax (tax-deferred) retirement accounts: Traditional IRA and 401(k). You will pay taxes on this money when you withdraw them in retirement. The benefit of these accounts is that you can use them to reduce your taxable income as you’re making contributions.
- After-tax retirement account: Roth IRA. You will pay taxes on Roth contributions when you add them, using after-tax money. That means that you won’t have to pay taxes on withdrawals. This is especially helpful if you end up in a higher tax bracket in the future, because you won’t have to pay taxes at the higher rate on your withdrawals.
- Taxable money: Brokerage account – You have to pay taxes on dividends, interest and capital gains, but you can withdraw at any time.
Here’s an example of what that would look like:
Let’s say a married couple is approaching retirement and their income need is $150,000. This puts them in the 22% tax bracket. If they withdraw $100k from pre-tax accounts, plus another $50k from Roth accounts, they will drop to a 12% tax bracket.
So how would they do that? In this example, they might pull $100k from their traditional IRA account and $50k from their Roth. There are different ways to get there, but the end goal is a 10% decrease on taxable income.
Converting Pre-Tax Money in Retirement
When saving for retirement, many people skew heavily toward pre-tax accounts, especially 401(k)s. The reason for this is that 401(k) match money and profit-sharing are pre-tax, and that’s what most people have.
In this tax environment, it might make sense to pay taxes now so you have more income to pay with. Plus, the less money you put into pre-tax accounts, the less you’ll have to pay in required minimum distributions (RMDs.)
A couple years ago, the laws changed, pushing the age you have to take RMDs to 72. If you retire before that, you could consider converting some pre-tax money to a Roth IRA. If you want to learn more about Roth conversions, here are a couple previous posts that will help explain those:
2020 Roth and Backdoor Roth Conversions
Navigating a Backdoor Roth Conversion
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.