Most of a federal employee’s retirement income comes from one of three sources: Social Security benefits, retirement savings like the TSP or individual retirement accounts (IRAs), and a CSRS or FERS pension. Depending on their income levels, people use different strategies to minimize their tax burdens in retirement. Walker Capital Preservation Group can help clients of all income levels develop and implement tax strategies that will work for them.
Getting Help With Tax Diversification
Tax diversification helps those planning for retirement create the flexibility necessary to control their retirement tax rate by providing different distribution taxation options. There are three types of investment and savings accounts, and each of them offers a different approach to taxation.
Tax-deferred accounts let holders delay paying taxes on their investment gains, but withdrawals made after retiring will be taxed at ordinary rates (contributions and gains).
Tax-free accounts require paying taxes on the money contributed to the account but offer tax-free retirement withdrawals so long as some basic guidelines are followed.
Taxable accounts, such as brokerage accounts, are referred to as non-qualified accounts because they do not qualify for preferential tax treatment. Nonqualified accounts are required to pay taxes on capital gains which are calculated for each transaction (sale of a stock etc). Capital Gains tax rates are generally lower than income tax rates but require the asset to be held for more than one year – otherwise they are assessed short term capital gains rates (which are the same as normal income tax rates). Having taxes regularly interrupt the ability of these accounts to compound means that the taxes create a drag on the performance of the account.
Choosing the Right Retirement Accounts
There are many types of tax-advantaged retirement accounts for long-term savers. Popular options include:
401(k)s (Traditional TSP)
Roth 401(k)s (Roth TSP)
Each of these account types is subject to different forms of taxation. IRAs also have an earned wage limit for contributions, which employer sponsored plans like the TSP do not. Both IRAs and TSPs have a maximum contribution limit but contributions to an IRA (or Roth IRA) do not impact your contributions to the TSP. Walker Capital can offer custom tailored advice about which types of retirement accounts will offer the greatest long-term benefits.
Understanding Required Minimum Distributions
Required minimum distributions (RMDs) apply to most retirement savings accounts, including traditional IRAs and 401(k)s. The system requires savers to start taking out certain amounts of their money each year after reaching the age of 72. Failure to satisfy an RMD can result in a 50% penalty on the entire portion of the RMD that was not withdrawn before the deadline.
Unfortunately, the system that governs RMDs is quite complex, and if those distributions are not handled correctly, it could create a spike in the retiree’s taxable income that places him or her in a higher tax bracket. It’s always worth consulting a retirement planning and taxation expert to develop a plan for RMDs.
Proactive Planning Maximizes Gains
Because workers are expected to contribute to their retirement accounts over the course of their careers, it makes little sense to wait until exiting the workforce to consider how taxes in retirement work and how they will impact income. Being more proactive about planning allows workers to achieve their target retirement goals without worrying about excessive taxes cutting into their quality of life. Instead of waiting until retirement is imminent, visit https://walkercpg.com/ to learn about retirement tax strategies as early as possible.
Schedule a Consultation Today
Want to plan for a more satisfying retirement that doesn’t involve overpaying on state and federal taxes? Tom Walker is a nationally recognized retirement planning expert with years of experience helping clients plan for financial independence in retirement. We welcome federal employees, business owners and individuals concerned about their retirement tax liability to visit https://walkercpg.com/contact/ and fill out a contact form to request more information.