Diversification is the key to any winning investment portfolio or retirement planning. If you are saving actively for retirement, then you may also try for ways to do tax savings also. People are doubtful about how much will be taxable during retirement. For this, you need to consider your retirement savings as well as your pensions, social security, nonretirement investments, and all other sources of income. Another confusion is always about the tax rate after one retires. The rates now are low, but these may rise over time.
Even though there are many such variable factors influencing retirement taxes, you have the scope to better plan the tax outcome on retirement. One handy approach to this is to use the accounts with varying tax treatments, so you get control over the retirement income after taxes.
Robert Nico Martinelli explains tax on accounts
As suggested by Robert Nico Martinelli, there are several types of accounts you can try out for retirement planning, each of which comes with a set of advantages and varying tax rates.
- Tax-deferred retirement accounts
Contributions into these accounts like 401(k)s, 403(b)s, IRAs, etc., reduce the tax on income while you make the contribution. These contributions are not taxable until retirement, but t, these may be taxable based on the ordinary tax rate when you take it out after retirement.
- Roth accounts
These are various forms of tax-deferred accounts. For example, the contributions which are going through the account as Roth 401(k)s and IRAs are built with the after-tax funds, which may not reduce taxable income at the current point.
- Taxable retirement accounts
There are some traditional brokerage and traditional bank accounts which are funded with some after-tax dollars. For the brokerage accounts, you may sell the securities and also contribute and withdraw money at various times for any given reasons without any penalty. Any taxable investments categorized as incomes may be taxed for the year of its earning, and the investments sold for profit are also subjected to taxes related to capital gains. If you are selling any investment at a loss, you may be able to use the offset on gains, up to $3,000 of the ordinary income. All the accounts are exempted from the RMDs.
- Health-related savings accounts
Even though these are not considered retirement funds, the health savings accounts of the HSAs can also be considered as savings vehicles, especially if your employer offers something like that. The contributions which reduce the taxable income up to a particular annual limit and the investments tend to grow tax-free, whereas you need to pay no tax on its withdrawals for any medical expenses which are qualified. When you are at age 65, these withdrawals can be taxed as ordinary income taxes for any nonmedical purposes. The HSAs, however, are exempt from the RMDs.
So, Robert Nico Martinelli suggests that you first identify the right mix of savings accounts you need to consider for retirement investment. This choice may depend on varied factors such as the marginal tax at present, the tax rate applicable during your retirement, what kind of flexibility you want to have for your tax during retirement, etc. You can also take the assistance of a good tax consultant to know how it can be combined well.