The Time Is Now to Get Your Tax Strategy Right for Retirement

by John L. Savarino

Financial planning for retirement should always be a thorough and careful process. Fundamental to it is being cognizant of the many variables that can affect our income, investments, taxes and savings.

Well, some of the key variables are volatile right now. Inflation has hit a 40-year high. The Federal Reserve likely will raise interest rates in 2022 from current historical lows, and the stock market has been turbulent.

Amid these concerns as we head into tax season, some people may want to revisit their retirement plan, consider making adjustments and pay extra attention to their tax strategies. Currently, tax rates are the one thing you can count on, but for how much longer is debatable. The Tax Cuts and Jobs Act of 2017 reduced tax rates across most tax brackets but expires at the end of 2025. Given our soaring national debt, which has surpassed $30 trillion, many financial experts and politicians think income tax rates will go back up after 2025 or perhaps before.

The uncertainty about future income tax rates is all the more reason to take advantage of low rates now – and to look at the big picture as you plan for retirement. Tax time is always the right time to focus on how you can lessen your taxes over the next year, near future and long term. There are tactics you can use to help minimize your tax obligations and remain aligned with your retirement goals.

Here are some tax strategies to consider as you plan for your retirement:

  • Health savings accounts. These can be effective savings vehicles if your employer offers one. Contributions reduce your taxable income up to annual limits. For 2022, you can contribute up to $3,650 for individual coverage and up to $7,300 for family coverage. Account holders 55 or older can contribute an additional $1000. Investments grow tax-free, and you pay no tax on withdrawals for qualified medical expenses. Many people are likely to have increased medical expenses in retirement, so it makes sense to pay for them with tax-free dollars. HSAs are exempt from Required Minimum Distributions.
  • Employer-sponsored 401(k). An employer-sponsored 401(k) allows you to lower your taxable income by making pre-tax contributions and to build substantial savings for retirement. Employees can contribute up to $20,500 in 2022 and, for those 50 and over, an additional catch-up contribution of $6,500 is allowed. Consider your age and income level when weighing the percentage of your contribution and the level of risk with your portfolio.
  • Roth conversion. A Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) into a Roth IRA or Roth 401(k) account. A Roth IRA offers tax-free growth on the contributions and the earnings that accrue, and it takes some tax worry away in retirement. If you’re over the age of 59½ and if you’ve had the Roth IRA for over five years, you can withdraw money from the account with no taxes or penalties. And unlike a traditional IRA or 401(k), there is no RMD. There is no limit on how much you can convert from a tax-deferred savings to a Roth IRA in a single year, but there is a limit on a direct contribution to a Roth IRA – $6,000, or $7000 if 50 or older.

You do pay taxes on the amount of money you convert to a Roth in a given year, but considering today’s low rates and the tax-free benefits in retirement – especially given the possibility of being in a higher tax bracket in retirement – the Roth IRA is a popular option. It’s also a way to leave a tax-free inheritance to your heirs.

  • Permanent life insurance policy. The benefit of permanent life insurance goes beyond your family’s protection when you pass away. Such a policy also builds cash value, making it an asset you can use throughout your life. The death benefit from a life policy is generally tax-free, and the policy features a cash-value component that grows in a tax-advantaged way. If you need to dip into your funds, you can access the cash value tax-free up to the amount you’ve contributed through your premiums.

Tax planning for retirement means looking at your present and future finances in a new light. Learning the tax rules and savings strategies ahead of time by working with a professional planner can make a big difference in how much of your hard-earned retirement money you’re able to keep.

John L. Savarino is an investment advisor representative for Rooted Wealth Advisors. Savarino has passed his Series 65 Uniform Investment Adviser Law Exam and hosts a financial show on YouTube, Talking Money.

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