Minimizing Taxes in Retirement: Essential Tips

Managing your savings isn’t just about what you’ve accumulated; it’s also about minimizing taxes so you can make the most of what you’ve built.?

Effective tax management can be a game-changer, helping you keep more of your hard-earned money for retirement.?

Here are some practical steps to help you minimize taxes in retirement—and maximize your income.

Understand How Different Accounts Are Taxed

Knowing the tax impact of each retirement account type is the first step toward an efficient strategy.

• Traditional IRAs and 401(k)s: These accounts are great savings vehicles but terrible distribution vehicles. Why is that? They’re funded with pre-tax dollars, meaning you’ll pay taxes in retirement instead. If you’re thinking you need $1M to retire, don’t forget to save the taxes on top of it. For example, if you’ll be in the 24% tax bracket, you really need more like $1.24M to retire.
• EPs, ETAs and Roth IRAs: Contributions are made with after-tax dollars, so qualified withdrawals are tax-free. Having both pre-tax and after-tax assets in your retirement portfolio is key. The less tax you need to pay in retirement, the better. These types of accounts are especially valuable if you expect your tax rate to stay the same as your earning years or even increase due to things like estate or trust inheritances.
• Taxable Accounts: Investments in the stock market, for example, are subject to capital gains tax on any profits. Long-term gains, however, are usually taxed at a lower rate than ordinary income.

By understanding the tax implications of each account type, you’re better prepared to make decisions that keep your taxes low.

Consider a Roth Conversion Alternative

First, note that a typical Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth IRA and paying the associated taxes at the time of conversion.

Now, let’s recognize that there are other options to better utilize your already-accumulated funds:

The Enhanced Tax Alternative (ETA) is a different tool for moving funds from a qualified plan into a tax-free asset. Specifically, ETA differs from a ROTH Conversion because the taxes are not paid out of pocket, keeping the entire amount of your savings intact and growing when moved.?

Rather, the taxes are paid with leverage. You might initially wonder, “Why take out a loan when I have the money now?” and the answer is simple:

The interest earned on the full investment offsets the interest expense on the loan. That difference compounded over time provides a significantly greater retirement benefit. See exactly how it works with this retirement calculator.

Use Tax-Efficient Investments

Choosing tax-efficient investments can help reduce the taxes you owe on your gains. EFS specializes in working with Financial Planners and CPAs to help structure their clients’ portfolios to maximize these advantages. Integrating tools like the ETA Roth conversion alternative, and Enhanced Pensions, or Buffer Asset is our niche specialty. Before an individual makes any major decisions about their retirement plan, we always recommend consulting with a CFP.

Final Thoughts

Minimizing taxes in retirement helps preserve your wealth for a financially comfortable future. Incorporating these strategies help you keep more of your money. I always say it’s about retaining more value.

With the right guidance and ongoing adjustments, you’ll be set for a tax-efficient retirement. Have questions? Reach out to me at [email protected] or call 773-318-9608.

Jeff Faine is the Founder of EFS Life, a firm dedicated to enhancing lives through tax savings and efficient distribution vehicles. He is a husband, father of two, former NFL Offensive Lineman and Notre Dame Alumnus. He is also the Co-Founder of The Faine House, an organization providing safe housing, mental health support and life skills programming for teens aging out of foster care.?