Are you worried about outliving your retirement savings? It's a legitimate concern that many, given rising life expectancies, the escalating cost of living, and rising healthcare expenses. This is one of the most frequently asked questions we receive from future retirees and retirees concerned about managing their retirement savings and other sources of income.
The intricate web of investment options, tax considerations, and future uncertainties can make retirement planning complex. This is where the role of a fiduciary investment advisor in Greenville, SC, comes in. Using their years of experience and training, they can help turn your retirement savings into a sustainable income stream so that you can realize financial security for all of your golden years.
As an independent fee-only fiduciary investment advisory firm in Greenville, SC, Global View has been helping successful individuals and families manage their retirement savings with tax-efficient strategies for over 20 years.
In this blog, we’ll review seven tax strategies you can use to protect the value of your retirement savings into lasting income. Let’s get started.
Turning retirement savings into sustainable income is a goal for many individuals, and it's crucial to consider the tax implications when planning an effective investment strategy.
Here are a few tax-efficient strategies:
#1: Utilize Tax-Advantaged Retirement Accounts
Retirement accounts like 401(k)s, 403(b)s, traditional Individual Retirement Accounts (IRAs), Roth IRAs, etc., provide different types of tax advantages. For example, traditional IRA and 401(k) contributions are tax-deductible and grow tax-deferred. But, distributions in retirement are taxed as ordinary income.
Conversely, Roth IRA contributions are made with after-tax dollars but grow tax-free, and distributions during your retirement years are also tax-free, provided certain conditions are met.
Depending on your circumstances, having a mix of these accounts may make sense to diversify your tax exposure in retirement.
Takeaways: Taxes are a form of erosion that reduces the amount of income you will have available for your retirement years. You will have more assets later in life if you practice tax management during your working and early retirement years.
#2: Think About Asset Location
Where you hold your investments matters. Asset location is an important yet often overlooked aspect of a comprehensive retirement savings and income strategy. Asset location ensures you have tax-efficient investments in taxable accounts and less tax-efficient investments are protected in tax-advantaged accounts.
This strategy involves assigning asset classes to different investment accounts to optimize tax efficiency. Typically, this involves housing more inefficient assets, like bonds and REITs, in tax-advantaged accounts such as 401(k)s or IRAs.
On the other hand, more tax-efficient assets like stocks are generally best held in taxable accounts where they can benefit from lower long-term capital gains rates.
Practicing efficient asset location can increase your portfolio's after-tax returns, which is especially crucial for assets that produce long-term retirement income. However, the strategy requires thoughtful planning and management, considering individual tax situations, investment time horizons, and withdrawal strategies.
Takeaways: Asset location strategy should be an integral part of your retirement planning to ensure that your savings and income in retirement are structured in a tax-efficient manner.
#3: Strategic Withdrawals During Retirement
Once you are retired, the order you withdraw from your accounts can have significant tax implications. As part of a retirement savings and income strategy, a strategic withdrawal order involves scheduling the sequence and timing of withdrawals from various retirement accounts to maximize your available assets later in life.
This approach allows retirees to leverage tax benefits, minimize penalties, and extend the longevity of their savings. For instance, some individuals may withdraw from taxable accounts, followed by tax-deferred accounts like 401(k) or IRA, and lastly, tax-free accounts like Roth IRAs. The rationale is to let the money in tax-advantaged accounts grow for as long as possible.
Each withdrawal sequence has unique benefits and potential pitfalls, making it a critical aspect of retirement planning. The best strategy would be based on individual financial circumstances, life expectancy, market conditions, and changes in tax laws.
Takeaways: Strategic Withdrawal Order is not a one-size-fits-all strategy but a personalized, tailored approach for managing distributions from your retirement funds. Consulting with a Global View investment advisor can provide valuable insights into optimizing this order based on your circumstances, ensuring the pursuit of a steady, sustainable income for all of your retirement years.
#4: Roth Conversions
If your retirement tax rate is higher than when you were working, converting traditional IRA or 401(k) funds to a Roth IRA might be beneficial. This involves paying tax now on the converted amount but then having the ability to receive tax-free distributions during retirement years.
By converting part or all of your traditional IRA or 401(k) assets into a Roth IRA, you pay taxes that year on the transferred amount. In general, future withdrawals, including dividends, interest, and capital gains, can be distributed tax-free. This is particularly beneficial if you anticipate higher tax rates in retirement or are focused on tax diversification.
Another advantage is that Roth IRAs do not mandate required minimum distributions (RMDs) during the owner's lifetime, allowing the account to grow tax-free for longer periods. A Roth conversion provides an opportunity to leave tax-free income to heirs.
However, a key point is the potential tax implications at the time of conversion, as it can bump you into a higher tax bracket.
Takeaways: It’s crucial to plan any IRA conversions strategically, possibly spreading them over several years. With proper planning, Roth conversions can be an effective tool to maximize retirement savings with tax-free distributions.
#5: Qualified Charitable Distributions (QCDs)
If you are 70½ or older and have a traditional IRA, consider qualified charitable distributions (QCDs). QCDs are distributions given directly to a qualified charity and can count towards your RMDs, reducing your taxable income.
After reaching the required age, you can make direct IRA transfers, or QCDs, of up to $100,000 per year to eligible charities.
These distributions are not counted as taxable income, which helps lower your adjusted gross income (AGI) and potentially reduce the taxes on Social Security benefits and Medicare premiums.
QCDs can also count towards your required minimum distributions (RMDs) for the year.
Takeaways: By directing a portion of your RMDs to charity via QCDs, you can satisfy your philanthropic goals while optimizing your tax situation. This can help preserve your retirement savings and provide a stable income in your golden years. Before you use this tax strategy, we recommend connecting with the Global View team, as QCDs require precise execution to ensure their tax advantages are fully realized.
#6: Tax-Loss Harvesting
Tax loss harvesting is an important tool that can significantly contribute to your retirement savings and income strategy. It involves selling taxable investments that have declined in value to offset capital gains and income taxes.
The sold investments are replaced by similar ones, maintaining an optimal asset allocation for risk management and future returns. The key advantage of tax loss harvesting is the opportunity to lower your taxable income, freeing up more money to be invested for retirement.
Takeaways: By selling losers for their tax benefits and reinvesting the proceeds in potential winners, you will reduce your taxes and position your portfolio for better performance in the future. All investors should use this discipline by accumulating and preserving assets for retirement.
#7: Determine When to Begin Taking Social Security Benefits
Determining the optimal time to begin taking Social Security benefits should be an important step in your comprehensive retirement income strategy. The earliest age to receive benefits is 62, but if you can wait, your monthly payouts will steadily increase to 70.
Your timing decision should consider various factors, such as:
- First, your health status and family longevity history play key roles. If you expect a longer lifespan (retire at 65 and live to 95), delaying your benefits might be financially beneficial.
- Next, consider your financial situation. If you have ample savings or other income sources, delaying Social Security benefits might be your best option.
- Starting benefits early makes sense if you need immediate income or have health concerns that may limit your lifespan.
- Remember, if you decide to take benefits at 62, your monthly payout will be significantly lower than if you wait until your full retirement age, which varies from 66 to 67 for people born after 1943.
- Another consideration is your employment status. If you're still working, starting benefits early could result in reduced benefits due to income limitations.
Takeaways: Ultimately, the decision is highly personal and depends on your unique circumstances. By delaying your Social Security benefits, you not only increase the amount you receive per month but may also be able to manage your income to stay in lower tax brackets during your early retirement years.
It's crucial to remember that everyone's situation is unique, so what works for one person may not work for someone else. Before implementing any of these strategies, you should consult with our team of fiduciary investment and retirement planning advisors in Greenville, SC.