When it comes to investing for retirement it’s not just a matter of how much you make – it’s also a matter of how much you keep.
The surest way to boost the returns on your retirement money can come from cutting the bite that the tax man takes out of your nest egg. That leaves you not only with more income to enjoy once you stop working but also leaves more of your investment portfolio untouched so it can continue generating gains in your golden years.
Here’s a look at four strategies recently highlighted by John Manganaro at ThinkAdvisor.com.
If you’re an early retiree who needs to find income until you’re eligible to collect Social Security – or if you want to increase your monthly benefit by delaying your benefit payments – there’s a little-know move you can make with your 401(k) or 403(b) workplace plan that can help.
It’s called the “rule of 55” and it allows workers 55 and older who leave their jobs to start taking withdrawals from their current workplace plan without taking the hit from the 10% penalty that typically applies to withdrawals taken before age 59.5. Some public safety workers can take advantage of this at age 50, so check your plan details with your benefits administrator.
Two caveats are that not every plan offers this option, and that you’ll still have to pay your normal income tax on your withdrawals – just not the 10% penalty. This exception applies only to your current workplace plan, not older accounts you may have left with previous employers. If that’s the case, consider rolling your old accounts into your current employer’s account so that you can access more of your savings. And, of course, this exception doesn’t apply to 401(k) money that’s been rolled into an IRA.
2. Move 401(k) Money Into Your HSA
This is a neat trick that cuts your 401(k) tax bill even more – if you meet all the right conditions. If you’ve got a high-deductible healthcare plan that allows you to open a Health Savings Account, you can use your potentially taxable 401(k) withdrawal to contribute to your HSA, where contributions are untaxed. That would wipe out any tax due on the amount of 401(k) money you add to your HSA, which can be as much as $3,850 in 2023 if your plan covers only you, or up to $7,750 if your healthcare plan covers your family.
To make this work, both the 401(k) withdrawal and the HSA contribution need to take place during the same tax year. A financial advisor can help you execute a tax strategy designed for your goals.
3. Manage Your Tax Bracket on Capital Gains
If you can get yourself into the 0% capital gains tax bracket, you’ll pay exactly that much tax on profits from your investments – 0%. That bracket applies to single taxpayers with taxable income up to $41,675 for 2022, or $83,350 for married taxpayers filing jointly. There can be times when you’ll be able to reduce your income below that amount, such as when you or a spouse leaves work, takes time off to care for children or a relative, returns to school or retires. You also can use your retirement contributions to manage your taxable income, as well.
A couple taking the standard federal deduction of $25,900 can earn a gross income of about $109,000 and still stay in the 0% capital gains bracket. But what if you’re close to the level but still over the limit? If, for example, the couple was $10,000 over the limit, one wage-earner can contribute that amount to their 401(k) or other tax-deferred workplace account and keep their gross earnings below the 0% capital gains limit.
If you haven’t wanted to pay the tax bill on converting a traditional IRA to a Roth, the current down market could prompt you to reconsider. If losses on stocks and other investments have significantly lowered the value of your account, making a conversion now reduces the tax bite now and means future earnings when the market eventually recovers will be tax-free.
Be aware that when it comes to Roth conversions, that money must remain in the Roth account for five years before you can take tax-free withdrawals. Earlier withdrawals will result in a 10% penalty. One trick is that the five-year period starts at the beginning of the year in which you make the conversion so that a conversion made in December is considered to have been made for one full year.
As always, tax and investment decisions are not only complicated but vary widely depending on each investor’s individual situation, so consider speaking with a financial advisor to make a plan.
Bottom Line
The best way to boost the returns on your retirement money hinges on reducing the amount of money Uncle Sam takes out of your nest egg. Building a Social Security brdige strategy, moving 401(k) money into an HSA, managing your tax bracket on capital gains and executing a Roth IRA conversion can all help. Be sure to enlist the services of a financial advisor for help with retirement planning.
Tips for Getting Retirement Ready
Industry experts say that people who work with a financial advisor are twice as likely to meet their retirement goals. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to set up and plan your retirement goals, SmartAsset’s retirement calculator can help you figure out how much you will need to save to retire comfortably.
Another easy way to save for retirement is by taking advantage of employer 401(k) matching. SmartAsset’s 401(k) calculator can help you figure out how much you will have based on your annual contribution and your employer’s matches.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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