Tax Efficiency in Retirement

March 13, 2023

Will you pay higher taxes in Retirement? The answer to this largely depends on how you generate income. Will it be from working or retirement plans? If it comes from retirement plans it’s important to understand which type of plans will be financing your retirement.

What’s a pre-tax investment? Traditional IRAs and 401(k)s are examples of pre-tax investments that are designed to help you save for retirement.

You won’t pay taxes on the contributions you make to these accounts until you start to take distributions. Pre-tax investments are also called tax-deferred investments, as the money you accumulate in these accounts can benefit from tax-deferred growth.

For individuals covered by a retirement plan at work, the tax deduction for a traditional IRA in 2023 is phased out for incomes between $116,000 and $136,000 for married couples filing jointly, and between $73,000 and $83,000 for single filers. (IRS notice 2022-55)

Keep in mind that once you reach age 73, you must begin taking required minimum distributions from a traditional IRA, 401(k), and other defined contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59.5, may be subject to a 10% federal income tax penalty.

Will you pay higher taxes in retirement? The answer to this largely depends on how you generate income. Will it be from working or retirement plans? If it comes from retirement plans it’s important to understand which type of plans will be financing your retirement.

What’s an after-tax investment? A Roth IRA is the most well-known. When you put money into a Roth IRA, the contribution is made with after-tax dollars. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2023, contributions to a Roth IRA are phased out between $218,000 and $228,000 for married couples filing jointly and between $138,000 and $153,000 for single filers. (IRS Notice 2022-55)

TO qualify for the tax-free and penalty-free withdrawal earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59.5. Tax-free and penalty-free withdrawal can also be taken under certain circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

This article is for informational purposes only and is not a replacement for real-life advice, make sure to consult your tax, legal or financial professional before modifying your retirement strategy. In our next article we will discuss after-tax investments.

Are you striving for greater tax efficiency? In retirement, it is important and worth a discussion. A few financial adjustments may help you manage your tax liabilities.