How Will Taxes Impact Your Retirement?

If you’re nearing retirement or already retired, it’s important to understand how taxes (and recent changes to them) could impact your retirement income, as there may be steps you can take to help manage your tax burden and potentially hold onto more of your hard-earned dollars.

Since everyone’s tax situation is unique and tax laws tend to change from year to year, accessing accurate and timely information can be a challenge. However, learning to navigate the retirement tax maze effectively can significantly impact your take-home earnings over time. This guide outlines some of the things to consider as you piece together your retirement income plan.

What to Know About SECURE 2.0

The recently passed SECURE Act 2.0 introduced a number of changes to the realm of retirement planning, with an emphasis on broadening access to retirement plans, improving plan flexibility, and encouraging saving in general. The document containing the full list of changes is extensive, so here are some of the items worth paying closer attention to:

New Rules for Required Minimum Distributions RMDs)

  • The starting age for RMDs has increased to 73. By 2033, the starting age will be 75
  • The penalty for failing to take an RMD has decreased to 25% of the shortfall and can be further reduced to 10% for corrected tax returns
  • In-plan annuity payments exceeding your RMD amount can apply the excess to the year’s RMD
  • Starting in 2024, Roth accounts in employer plans are exempt from RMDs

Higher Catch-up Contributions

  • Starting in 2025, those between the ages of 60 and 63 can contribute $10,000 to their retirement plans each year as a catch-up contribution
  • Starting in 2026, those earning over $145,000 must make catch-up contributions to Roth accounts using after-tax dollars
  • IRA catch-up limit for those over 50 will be indexed to inflation starting in 2024

Automatic Enrollment and Plan Portability

  • Starting in 2025, new 401(k) and 403(b) plans must automatically enroll eligible employees
  • Retirement accounts with low balances may be automatically transferred when changing jobs

Student Loan Repayment

  • Starting in 2024, employers can match employee student loan payments with contributions to a retirement account

529 Plan Rollovers

  • After 15 years, assets in a 529 plan can be rolled over to a Roth IRA for the beneficiary, subject to certain limitations

Methods To Help Manage Retirement Taxes

For retirees and pre-retirees looking for ways to better manage their tax burdens in their golden years, here are a few strategies that can help.

Harvest Investment Losses

Tax-loss harvesting involves selling certain investments at a loss in order to offset the capital gains you’ve realized from selling other investments at a profit. By strategically using these losses to counterbalance gains, retirees may be able to lower their taxable income. It’s recommended that you consult with a financial professional on this topic, as tax-loss harvesting can be a complicated process.

Do a Roth Conversion

A Roth conversion entails moving assets from a traditional IRA — which is funded with pre-tax dollars — into a Roth IRA. Since Roths are funded with after-tax dollars, you’ll have to pay taxes on the transfer, but by fulfilling your tax burden up front, you can enjoy tax-free investment growth and tax-free withdrawals in retirement if certain conditions are met.

This strategy may be better suited for investors who anticipate being in a higher tax bracket later in life.

Retire to a More Tax-Friendly State

Of all the factors that can influence your retirement tax burden, few are more impactful than where you decide to spend your retirement years.

Whether you’re thinking about downsizing or are simply in the mood for a change of scenery, you’ll want to account for more than just the weather when picking your ideal retirement location. Here are some questions to ask yourself:

  • What is the combined state and local income tax rate?
  • What types of retirement income Social Security, retirement account income, etc.) are subject to income taxes?
  • What are property taxes like?
  • Does the state impose an estate or inheritance tax?

If you do end up moving, keep in mind that the IRS allows you to exclude up to $250,000 from the sale of your home for income tax purposes. If you’re married, the exclusion increases to $500,000.

Stay Ahead of Taxes During Retirement

As with other aspects of financial planning, the best retirement plan is a proactive one. While you can’t fully predict how tax laws and regulations will change with each passing year, striving to create a diversified portfolio that aligns with your personal goals can position you for long-term financial confidence.

While you work to safeguard your loved ones’ future as well as your own, partnering with a financial advisor can help keep you on track to reach the retirement you envision.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Tax loss harvesting is a strategy of selling securities at a loss to offset a capital gains tax liability. It is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains, though it is also used for long-term capital gains.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

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