Your Guide to Reducing Tax Confusion During Your Retirement Years

Choosing the right Buffalo Grove CFP® professional can be crucial, especially as you get closer to retirement. You must make several important financial decisions impacting your quality of life and financial security. Many Buffalo Grove residents near retirement have told us their financial future seems more like a puzzle than a plan. 

We know you have a lot on your plate, from concerns about the looming possibility of a 2024 recession to the uncertainty of an election year and what that may bring. Then there are the day-to-day concerns about investing, risk, and taxes. We hate to say it, but the process does not get simpler as you age. 

For example, nobody wants to pay more taxes during retirement than they have to. So, it’s crucial to develop a tax strategy that minimizes your tax liabilities and seeks to secure your financial future.

This blog will provide valuable insights into smart tax planning and investment strategies for a more comfortable and secure retirement.

Read our latest comprehensive guide: Mapping Your Journey: Four Pillars of Smart Retirement Planning

Tax-Advantaged Accounts

Tax-advantaged accounts should be a cornerstone of your tax planning efforts for your retirement years. Contributing to tax-advantaged accounts like a 401k or IRA is crucial when saving for retirement. The immediate benefits are twofold: Contributions are often deductible (subject to limitations), reducing your taxable income. Second, the funds grow tax-deferred, allowing you to harness the full power of compound rates of return without the drag of capital gains or income taxes. 

In 2023, if you are 50+, you can contribute an additional $7500 to tax-advantaged accounts, boosting your retirement savings. These additional contributions come with specific limits, so it’s important to discuss this with a Buffalo Grove CFP® professional. 

After you transition from working years to retirement years, the rules begin to change. Required Minimum Distributions (RMDs) kick in, typically starting at age 72. You’re required to withdraw specified amounts annually from your tax-deferred accounts. Failing to do so can result in hefty penalties. 

Here’s where RMD management becomes vital. These distributions are treated as taxable income, and poor planning can easily bump you into a higher tax bracket, eroding the tax benefits you enjoyed during your working years.

Let’s chat about Roth IRA conversions in the last part of our review of tax-advantaged accounts. Simply put, this is a savvy move where you shift money from your Traditional IRA into a Roth IRA.

Why would you do that? You’re paying your taxes upfront at today’s rates instead of delaying paying taxes on retirement funds years when tax rates could be higher than they are currently. You pay current income taxes on the converted amount at today’s tax rates rather than deferring those taxes to a potentially higher rate after you retire. The beauty of a Roth IRA is once you have paid taxes for the transfer, all subsequent growth in the account, along with qualified distributions, is tax-free. 

Think of it as a tax-free inheritance for your heirs. Timing, as they say, is everything. Make the move in a year when your income drops, or you have enough deductions or credits to offset the conversion. This is how you make this strategy work for you.

SGL Tips: While tax-advantaged accounts are indispensable for building a secure retirement nest egg, they come with attached strings. Proper RMD management and post-retirement tax planning are key to maximizing savings.

Watch our co-founder, Steve Lewit, discuss how to prepare for the unexpected. 

Tax-Efficient Asset Location Planning

Tax-efficient asset location is another crucial component of a well-rounded retirement and tax planning strategy. 

While cutting your tax bill is great, recognize asset location for asset allocation. Asset location is about placing your investments in tax-efficient accounts. 

At the same time, asset allocation focuses on diversification that spreads your investments—like stocks, bonds, and cash equivalents—across various market sectors to defend against significant downturns. The key is to nail down your ideal asset allocation; only then should you consider which accounts are best for tax savings.

The core principle behind asset location is straightforward: allocate investments to accounts that minimize your tax liability over time. 

In practical terms, you should place tax-efficient assets in taxable accounts and those not tax-efficient in tax-advantaged accounts. Why? Investments like stocks and tax-efficient mutual funds, which usually produce capital gains taxes, are best suited for taxable accounts. For example, when you sell these investments, you’re liable for a lower tax rate based on long-term capital gains.

On the other hand, tax-inefficient investments like interest from bonds or high-turnover mutual funds are better suited for tax-advantaged accounts such as 401(k)s or IRAs. The interest income accumulates tax-free until it is distributed from the accounts when it is taxed as ordinary income, which usually carries a higher rate than capital gains tax rates. 

By sheltering these in a tax-advantaged account, you defer this higher tax liability, perhaps even until you retire when your income might be lower.

SGL Tips: When it comes to tax planning after you retire, optimal asset location becomes even more crucial. Working with a Chicagoland retirement planner can provide local, specialized insights into implementing an effective asset location strategy for your golden years. The goal remains the same: maximize your after-tax returns to lead a financially secure life.

Buffalo Grove Retirement Planning Specialists

Based on the potential for several economic headwinds and a contentious election approaching in 2024, it’s becoming increasingly obvious that those nearing retirement should consider these tax strategies and more. As Benjamin Franklin liked to say, “Failing to plan is planning to fail.”

When considering a financial advisor in Buffalo Grove who can help you create a comprehensive retirement plan, we hope you’ll consider SGL Financial. 

Here at SGL Financial, we don’t just do retirement planning; we redefine it. Instead of offering you a one-size-fits-all financial blueprint, we’ve meticulously crafted our unique Four Pillar Retirement Plan. This customized approach zeroes in on four critical components for a secure retirement:

• Sustained Income – Ensuring you have the cash flow you need.
• Intelligent Investment Strategies – Managing your portfolio wisely.
• Tactical Tax Planning – Reducing your tax burden effectively.
• Thoughtful Legacy Planning – Securing your estate for future generations.

Our aim? To offer you a personalized financial strategy that stands the test of time in various market conditions.