Tips for a Successful Retirement, Part 2: Tax-Deferred Accounts
In Part 1, we reviewed the importance of having 3-6 months of emergency cash savings. Once that’s accounted for, it’s time to start taking advantage of tax-deferred accounts. These come in a variety of names and structures (401k, IRA, 403b, etc.), but all accomplish the same goal: Allow you to delay paying taxes on contributions until they’re distributed in retirement. For example, if you make $100k and contribute $15k to your 401k, you’re only responsible for paying income taxes today on the remaining $85k. You’ll pay taxes on the $15k contribution (plus any growth) in retirement. Why is this so important? Why not just pay the taxes now and not worry about it later?
1. You’re most likely in a higher tax bracket now than you will be during retirement. While we don’t know exactly where tax rates will be in the future, we should assume that not working and collecting social security in retirement will put you in a lower tax bracket.
2. You’re not required to start taking money out of a tax-deferred account until age 72. If you don’t need it until then, you’re giving the investments inside that account a long time to grow!
3. If you elect to own investments in an after-tax account, your tax situation gets more complicated. When you sell an investment in an after-tax account for profit, you may have to pay capital gains tax on the profit. So, in addition to paying income tax at a higher tax bracket, you’ll also have to account for capital gains tax as well.
Whether you’re a business owner or employee, strategies are unique and require careful planning. To view an estimate of your retirement funds, use this estimator. Please contact us If you need advice on how best to maximize your retirement strategy. Our mission is simple. It’s focused on you!