The impact of taxes is one sometimes ignored part of retirement preparation. Without careful planning, taxes can significantly reduce your retirement savings.
After taxes, a $1 million portfolio in a 401(k) plan or regular IRA might be worth $800,000 or less. Similarly, if your investments are in a conventional, taxable brokerage account, the income generated by those investments may be taxable as well.
One solution is to save and invest more during your working lifetime so that you have additional money to pay your taxes. Another thing you can do is be tax-smart with your investments and account selections to keep your tax bill to an absolute minimum. Here are some examples of non-taxable retirement income.
Draws from a Roth IRA
Using a Roth account is the simplest approach to save taxes on your retirement funds. Roth accounts, which don’t provide a tax benefit for contributions but permit tax-free withdrawals after age 59 12, can be set up for both IRA and 401(k) plans.
Essentially, when you contribute to a Roth account, you pay your taxes up front rather than when you receive dividends. You can convert your traditional plan to a Roth at any time, even if you aren’t allowed to contribute to a Roth if your income is more than a particular threshold ($144,000 for single filers and $214,000 for joint filers). However, just like if you had taken the money out, you will be required to pay income taxes on the conversion amount.