Podcast Episode 446: I’m 62 with $800K: How Can I Lower Taxes in Retirement?
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An important question as you near retirement with a solid nest egg is not how much you saved, but how much you’ll keep. If most of your savings are in tax-deferred retirement accounts, each withdrawal may face both federal and state taxes. Understanding both where your money is and how taxes will apply is key.
In this episode of Money Wisdom, Nicholas J. Colantuono, CFP® explains why retirement planning isn’t just about investments; it’s about building a tax strategy that works for the rest of your life.
Evaluate Your Retirement Account Contributions
While you’re still working, contributing to tax-deferred accounts like 401(k)s or IRAs can reduce your taxable income. However, in retirement, you’ll eventually pay income tax on the withdrawals.
On the other hand, you fund Roth accounts with after-tax dollars, but you can withdraw the money tax-free later. Choosing between these options depends on whether you expect to be in a higher or lower tax bracket in the future.
Time Your Withdrawals
Another key strategy is managing your withdrawals. If all your money is in tax-deferred accounts, you’ll likely have limited flexibility because every withdrawal is taxable. That’s why having a mix of account types—taxable, tax-deferred, and tax-free—is critical. This three-bucket strategy allows you to control your income and tax liability more effectively.
Consider Roth Conversions
A Roth conversion involves moving money from a tax-deferred account into a Roth account. You pay taxes on the amount converted now so it can grow tax-free in the future. This strategy can be beneficial if you expect tax rates to rise or future required minimum distributions (RMDs) to push you into a higher tax bracket.
Understand Your Full Financial Picture
Beyond taxes, it’s important to identify your sources of income and expenses when planning for retirement. One of the most significant expenses to account for is healthcare. If you retire at 62, you’ll need a plan to cover health insurance until Medicare begins at 65.
Social Security planning also plays a critical role. While benefits can begin as early as 62 or as late as 70, the right time to claim depends on your unique situation.
Ultimately, tax planning, income planning, healthcare, and investment decisions are all connected. Without a personalized plan, however, it’s difficult to know which financial planning strategies make the most sense. That’s why working with a financial professional can be so valuable, especially during the transition into retirement.
Want clarity about your tax situation? Get your free Are You Paying Too Much in Taxes in Retirement? guide by texting “OFFER” to 800-757-0436.
