When saving for retirement, it is crucial to understand how taxes might erode your nest egg after you reach your senior years. A higher retirement income is excellent, but a larger tax-free retirement income is even better.
Overall, high taxes are some of the reasons why individuals run out of money rapidly during retirement, along with poor risk management and losing money to Wall Street. Fortunately, there are a few tax-free investing alternatives available. In the most recent Allianz Life Quarterly Market Perceptions Study, 64% of respondents expressed concern that their income would not keep up with tax hikes.
Moving forward, the more measures you use to reduce or eliminate your tax liability, the more money you will retain. Here is why we will explore the most efficient options that will enable you to save money.
Invest in Roth IRA
Consider the Roth IRA the foundation for tax-free income in retirement. In 2022, you are permitted to contribute $6,000 to your Roth IRA ($7,000 if you are 50 or older). There is no tax deduction applicable to Roth IRA contributions, hence the funds grow tax-free and, most significantly, are withdrawn tax-free at retirement.
With a Roth IRA, the investor pays taxes on the money used to finance the account up front, but with a standard IRA, taxes are paid when the money is withdrawn. As long as money remains in the account, assets grow tax-free, and withdrawals are also exempt from taxation. They are often not suitable for high-income investors; if an individual earns too much, they cannot open a Roth IRA.
Choose Municipal Bonds
Frequently, retirees invest a part of their retirement funds in bonds in maintaining an acceptable degree of risk as they age. Treasury bonds are generally free from taxes at the state and local levels, while municipal bonds are exempt at the federal level. Investigate these opportunities to decide whether they should be included in your portfolio.
Furthermore, you will need to check that municipal bond investments are compatible with the rest of your investment portfolio. Income distributions from municipal bonds are exempt from federal income taxation but may be subject to state income taxation.
Not waiting until retirement to start preparing is the key to minimizing your retirement taxes. Instead, you should make plans far before you must depend on your retirement funds as your primary source of income. However, financial planning is no simple process. For those willing to create a solid plan for saving taxes during their retirement, Braxton Advisory allows you to connect with financial experts such as Zachary Christensen and Joshua Donjuan. Ultimately, connecting with those with the necessary expertise in building tax-efficient wealth-management solutions is essential.