Taxes are one of the most important things to consider when it comes to your retirement. You’ll likely have several sources of income in retirement that can be taxed, such as IRA distributions and Social Security benefits. But is your income tax-advantaged? A tax strategy for retirement income can help reduce your tax bill.
When money is distributed from a Traditional IRA, it’s taxed as ordinary income. In contrast, a Roth IRA is taxed with post-tax dollars. A Roth IRA can be a great asset in retirement due to its tax-free distributions, unlike traditional IRAs.
Those who are able can only contribute up to $6,000 per year if under age 50, or $7,000 per year if over age 50. But as you may know, people with income over $144,000 and couples with income over $214,000 cannot contribute directly to Roth IRAs. However, you can undergo a Roth IRA conversion to take advantage of the tax benefits of a Roth IRA.
Anyone has the option to convert any amount from a Traditional IRA, 401(k), or similar qualified retirement account into a Roth IRA or 401(k), regardless of income level. If your income strategy doesn’t include tax minimization, consider asking your financial advisor about a Roth conversion.
If a Roth conversion sounds like it could work in your retirement plan, you would pay tax on what you convert and then be able to withdraw money tax-free later. Make sure it’s the right decision for your retirement before using this strategy because Roth IRA conversions are irreversible, meaning that it’s subject to regular Roth IRA limitations: Money can’t be withdrawn penalty-free until five years after it’s converted, and typically not until age 59 ½.
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If you’re wondering how your retirement accounts may be taxed, or if you hadn’t planned for the taxes you may face in retirement, it might be worth a conversation with a financial advisor to assess how to minimize the taxes on your retirement income by talking to us at (603) 261-3736.
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Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.