Today’s question tackles a crucial topic: How can I save on taxes in retirement? Join us for this week’s Money Wisdom Question Series, where Jake Doser, CFP®, CPWA® shares invaluable tax strategies for your retirement.

Start Early for Maximum Benefits

Achieving tax savings in retirement often begins long before you retire. The first crucial decision involves how you contribute to your retirement accounts. There are two primary options: pre-tax contributions and Roth contributions.

Pre-Tax Contributions

Pre-tax contributions lower your taxable income today by allowing you to write off the contributions you make to your retirement account. You then pay taxes on this money later, a strategy known as tax deferral.

Roth Contributions

Alternatively, you can choose Roth contributions, where you pay the taxes up front. This means you get the tax payments out of the way and enjoy tax-free growth going forward. There isn’t a one-size-fits-all answer here; the best choice depends on your unique circumstances, such as your current and future income and potential changes in tax brackets.

Timing Your Withdrawals

The second critical decision revolves around how and when you withdraw money from your retirement accounts. Consider the following:

1. Social Security and Pensions: If you withdraw from your retirement accounts while also receiving Social Security and pension benefits, you may face taxes on all three sources of income. Staggering your withdrawals might help.
2. Combination Withdrawals: You might decide to withdraw from non-retirement accounts, such as bank savings or brokerage accounts, along with your retirement accounts to balance the tax impact.

Consider Roth Conversions

Another strategy worth considering is Roth conversions. This involves moving money from pre-tax retirement accounts to Roth accounts. By doing so, you pay taxes now and benefit from tax-free growth for the remaining time the money stays in your retirement account.

Key Decisions for Tax Savings

1. Contributions: Decide whether to use pre-tax or Roth contributions.
2. Withdrawal Timing: Plan the timing of your withdrawals to minimize tax impacts.
3. Roth Conversions: Evaluate whether converting pre-tax contributions to Roth accounts makes sense for you.

Consult a Professional

These decisions are crucial and often irreversible. Consulting with a financial professional ensures that you make informed, strategic choices tailored to your needs. Measure twice and cut once, as the saying goes.