Financial Well-Being — Retirement and Tax Planning

Saving for retirement can be a lot more complicated than just socking away money for later. By strategically coordinating your income, retirement accounts and investments to maximize tax savings, you may be able to reach your retirement goals more efficiently.

Assemble Your Team

It’s common to work with several professionals to manage different aspects of your financial affairs, such as CPAs for tax guidance, estate-planning attorneys, insurance agents and others. But are they working as a team to help you? Be sure to provide your advisor with contact information for your other professionals. This helps your advisor to be part of a coordinated financial team, ensuring everyone is working in concert to help you attain your financial goals.

Diversify Accounts For Tax Purposes

Having a mix of taxable, tax-deferred and tax-free retirement and investment accounts can provide a measure of control over taxable income as well as flexibility as tax laws change. Many people approaching retirement already have taxable and tax-deferred accounts. To add a tax-free account, you can contribute to a Roth 401(k) account or convert assets in tax-deferred accounts to a Roth IRA.

Investigate Tax Strategies

Don’t wait until year-end — talk to your financial advisor and CPA now about ways to minimize taxes or defer taxable income.

If you hold investments with unrealized taxable gains or losses from the current year, always be sure to share this information with your financial advisor before making any significant financial decisions. Strategically harvesting gains and losses in taxable accounts can lessen your capital gains tax. Selling underperformers can generate capital losses that can be used to offset your gains, plus up to $3,000 of ordinary income. If you’ve already sold some investments at a loss, you might consider taking capital gains on appreciated stock. As long as the gains aren’t more than your available losses, there may be no tax liability.

Next, you will want to work with your financial advisor and CPA to determine your expected income for the year, your adjusted gross income (AGI) and your tax bracket. Knowing this, you’ll be able to identify deductions and tax credits you can take advantage of, and you can examine strategies to minimize your tax responsibility.

One tax strategy is to delay a portion of your income — and defer taxes on that income — until the following year. For example, if an expected year-end bonus might propel you into a higher tax bracket, you can ask your employer to delay your bonus to the following year. You can also delay distributions from a traditional 401(k) or IRA, but at age 70½ you must take required minimum distributions (RMDs). On the other hand, if you have a large tax-deferred account balance, your RMDs might be more than you need for living expenses, and come with a significant tax impact. In such a situation, you may want to take distributions earlier. It’s imperative to work with a tax professional to determine the correct tax strategy for you.

Even if retiring seems far away, takings steps now to maximize your savings will help you prepare for the retirement you desire.