Tricks to Keep MORE of your IRA Withdrawal Money in Your Pocket!
If you’ve been diligently stashing away funds in your individual retirement account (IRA), it’s crucial to factor in the impact of taxes on your retirement roadmap.
Tax consultants are continuously on the hunt for fresh avenues to sidestep taxes linked to IRA withdrawals.
Numerous tactics exist to potentially reduce the tax burden on your IRA investments, yet consulting a financial advisor before committing fully to any particular approach is advisable.
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Ways to Potentially Reduce Taxes on IRA Withdrawals
Consider a Roth IRA
Consider opting for a Roth IRA over a traditional IRA as one of the easiest methods to potentially avoid taxes on IRA withdrawals.
With a traditional IRA, your contributions are made with pre-tax dollars, meaning you’ll face taxes upon withdrawal. In contrast, a Roth IRA is funded with after-tax dollars. Since taxes have already been paid on your Roth IRA contributions, you won’t incur any tax liability when you eventually withdraw the funds.
In the event of an emergency necessitating an early IRA withdrawal, you might still escape taxation with a Roth IRA. If you withdraw only your contributions and meet hardship exemption criteria, you may not owe any taxes.
Please be aware: Once you begin withdrawing earnings from your account, an early withdrawal will result in taxes. If you withdraw before reaching the age of 59 1/2, a 10% penalty applies to both types of accounts.
However, there are certain hardship exemptions that waive the early withdrawal penalty. In these cases, taxes may still be applicable depending on the circumstances. It’s crucial to utilize the funds from the IRA strictly for the purpose outlined by the exemption to avoid potential issues with the IRS.
Explore the Benefits of a Multi-IRA Approach
Having multiple IRAs can be justified by several investment strategies.
Exploring the Benefits of Multiple IRAs for Diverse Investment Strategies
Consider the Traditional AND Roth Combo
Harnessing the power of both traditional and Roth IRAs, each with its unique tax advantages, can pave the way for a savvy tax strategy.
By allocating your yearly contribution to your traditional IRA, funded with pre-tax dollars, you may trim your current tax bill as it directly reduces your taxable income. Meanwhile, directing funds into your Roth IRA sets the stage for tax-free income in retirement, thanks to contributions made with after-tax dollars.
Yet, before diving in, consulting a financial advisor is prudent. They can scrutinize your tax planning strategy, ensuring you steer clear of any unexpected tax surprises down the road.
Utilizing IRAs for Various Asset Classes
Another approach is to consider utilizing multiple IRAs to invest in various asset classes. For instance, investors might opt to allocate stocks to one IRA, bonds to another, and alternative assets such as cryptocurrency to a self-directed IRA. This strategy provides the flexibility for investors to analyze which asset types best align with their financial objectives.
Combining a Roth IRA with a Brokerage Account
Instead of maintaining multiple IRAs, another option to explore is having both a Roth IRA and a brokerage account.
In this hypothetical scenario, an investor could allocate dividend-paying stocks and interest-bearing bonds to the Roth IRA. This strategic placement aims to minimize tax liability, as dividends and interest are typically taxed at ordinary income rates.
Conversely, “growth” financial assets could hypothetically be positioned in the brokerage account. Withdrawals from these assets might qualify for the lower capital gains tax rate, potentially optimizing tax efficiency.
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Explore the option of a Roth IRA Conversion
A Roth IRA conversion involves transitioning your traditional IRA to a Roth IRA. In a Roth IRA, distributions after age 59 1/2 typically incur no tax payments.
Yet, the conversion itself triggers a taxable event.
If you foresee a higher tax bracket during retirement, converting your traditional IRA to a Roth IRA might be advantageous. Alternatively, consider converting a segment of your traditional IRA to a Roth IRA during years when you anticipate being in a lower tax bracket.
The Bottom Line
In the quest to protect your retirement savings from taxes, there are smart moves you can make. From choosing a Roth IRA, spreading investments across different asset classes, to considering a Roth IRA conversion, options abound. But it’s wise to seek advice from an investment adisor portfolio manager. By taking these steps, you can keep more of your money for yourself, ensuring a smoother financial journey ahead.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth | iA Private Wealth USA
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