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Margarita Spivak

Retirement Tax Planning: How Do Taxes Impact Your Retirement Savings?

Margarita Spivak

November 1st, 2020 | Written by

Retirement Tax Planning: How Do Taxes Impact Your Retirement Savings?Taxes may have a significant impact on your retirement savings. While paying taxes is something we all must do, proper retirement tax planning can stretch your saved dollars much further.

Income tax on withdrawals

When retirement tax planning, you must consider what type of retirement accounts you have. When you take money out of a traditional retirement plan, such a traditional IRA or a 401(k), your withdrawal will be subject to ordinary income tax. Remember, if you withdraw money before you’re 59 ½, you could also incur a 10% early withdrawal penalty. Before age 72, you control how much money you’d like to withdraw, and therefore the amount of taxes you owe. You can take out as much or as little as you like, as is appropriate for your unique situation. Remember, if you have other income sources, taking a withdrawal can put you in a higher tax bracket. It’s essential to consider this when planning your withdrawals. However, at age 72, you will be subject to mandatory withdrawals called “required minimum distributions” or RMDs. This will be a set amount that you will have to withdraw each year based on your age and account balance. If you take less than the RMD amount, you may face a 50% penalty on the difference between what you take out and what you should have taken out.

Roth Accounts

If you have a Roth account, your withdrawals will be treated differently. Remember, a Roth IRA or Roth 401(k) means that you deposited that money into your retirement account after you paid income taxes on it. This means that any growth in the account was tax-free, and therefore your withdrawals are tax-free. The same rule about withdrawing before you’re 59 ½ applies to Roth accounts – meaning you may incur a penalty if you withdraw before that date. If you have a ROTH IRA, there are also no RMDs, which means you never have to withdraw any funds. If appropriate for your financial situation, you can elect to leave the funds in the account for your beneficiaries without penalty or tax liability. This can be an enormous benefit when considering the best way to transfer assets to your loved ones.

Are you ready for retirement?

Proper retirement tax planning can greatly benefit your overall retirement plan. A financial advisor can help you decide when to start taking distributions, how much you should take, which accounts you should withdraw from, or if you should leave it for your loved ones.

Are you ready for retirement? Take our retirement readiness quiz to find out!


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    This information is intended for educational purposes only. It is not intended to provide any investment advice or provide the basis for any investment decisions. You should consult your financial advisor prior to making any decision based on any specific information contained herein.

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    The Prosperity Consulting Group registered as a Registered Investment Advisor (RIA) in 2005. We have with a passion for providing clients with objective investment advice and wealth management solutions. Our purpose, coupled with our fiduciary commitment, is essential in helping clients achieve their financial goals. Our firm is dedicated to providing unparalleled financial planning and investment advice to individuals, families, businesses and institutions. We have identified key areas that are critical and integral to a client’s financial success. These planning areas encompass: Investment Planning & Management Retirement Planning Estate Planning Tax Planning Business Planning Insurance Planning Income Protection & Asset Preservation Education Planning 401(k) Planning
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