The April 15 deadline for income tax filing  has come and gone, and with it, the annual reminder of just how much of our hard-earned money is paid to the US Treasury. A simple calculation of dividing the amount on line 37 of the Form 1040 (your adjusted gross income), by the amount on line 63 (your total tax), will give you your effective tax rate. You can take a look at the chart below published by the Tax Foundation to see where you rank among the rest of American taxpayers.
Although we are reminded every year of our current tax responsibility, a challenge in planning for retirement is guessing what taxes will be like in the future. We know what the IRS and state tax regulator rules are now, but what will they be like many years from now? Based on history, we should anticipate change.
Planning for Retirement
Are there ways to minimize the tax bite out of our nest egg down the road? Certainly, with proper planning. Here are a few tips:
- Utilize tax deferred investments, such as an IRA or 401k. In general, salary deferrals saved now should be taxed at a lower rate once taken out of the IRA or 401k in retirement when your income level is most likely lower.
- Take advantage of Roth IRA’s and Roth 401k’s. Distributions from Roth accounts are tax exempt. You can invest already taxed income in a Roth and let it grow over time. You never will pay taxes on that growth. This will give you some flexibility when deciding on distributions from taxable, traditional IRA’s vs. non-taxed Roth IRA’s, helping you to manage your taxable income during retirement.
- Open a Roth now. There is a 5 year waiting period before distributions can be deducted without tax consequences. Even a small contribution can start the time clock ticking so you meet the waiting period requirements.
- Many employer sponsored plans now allow for yearly conversions of any amount within a 401k into a Roth 401k. You can manage the dollar amounts each year to make sure that you can handle the tax payments necessary on the converted dollars. You may be eligible to convert a Roth 401k amount even if you exceed the income limits.
- Invest your more aggressive savings into the Roth account and the more conservative investments in the traditional IRA or 401k. Let your account grow the fastest under the tax exempt status.
Some smart planning now can make a very big difference in how much of your retirement income is subject to taxes. Even though we have no control over the future tax law changes that Congress could implement, we can make good decisions based on what we know right now.
Choosing Punta Gorda Financial Planning for Tax Services
At Punta Gorda Financial Planning, we have CPA’s on staff to help answer all of your tax questions related to your retirement years. We can discuss your current situation and align your best tax strategies with your retirement goals. We can assist you in navigating the various tax rules, such as Roth conversion opportunities and other wise tax minimization choices.
Written by Thomas M. Geier, CPA, CFP®, PFS.
My aim is to offer clarity to your finances. I specialize in helping individuals and families determine what is most important in their financial lives, identify short and long-term goals, and make great choices for achieving comfort, security, and peace of mind.
I graduated from Loyola University in Baltimore, Maryland, and have been a Vice President of our investment management affiliate, Geier Asset Management, Inc, since its founding in 1999. I have over 25 years' experience in financial planning and investment management and am licensed as a Certified Financial Planner® professional, a CPA, and Personal Financial Specialist. I am member of the Personal Financial Planning section of the American Institute of CPS's and Florida Chapter of the Financial Planning Association.