In relation to retirement, wealthy Americans have a very different set of worries than the remaining of us.
On a regular basis Americans often fret over how much they should retire comfortably — or whether or not they’ll give you the chance to retire in any respect. In accordance with recent retirement research from the financial firm Northwestern Mutual, affluent folks already know those answers ($3.9 million, and yes, after all).
What they’re truly concerned about, the survey found, is taxes on those retirement savings.
Some 61% of rich respondents — defined as having a minimum of $1 million in investable assets — said they’ve a plan to cut back the taxes they’ll owe in retirement.
To that end, Northwestern Mutual broke down the preferred retirement tax strategies cited by the high-net-worth people within the survey. Listed below are the highest 10 responses:
- Making withdrawals strategically from traditional and Roth accounts to maintain themselves in a lower tax bracket (named by 44% of respondents)
- Using a mixture of traditional and Roth retirement accounts (37%)
- Making charitable donations strategically, as an illustration, benefiting from bunching itemized deductions (27%)
- Using a health savings account (HSA) or other tax-advantaged health care account (24%)
- Using products like everlasting life insurance or annuities for his or her tax advantages (24%)
- Making Roth conversions prior to taking required distributions or Social Security (23%)
- Using qualified charitable distributions from an individual retirement account, or IRA (22%)
- Making contributions to other tax-advantaged accounts like a 529 plan (17%)
- Using the idea paid into the money value of everlasting life insurance to maintain themselves in a lower tax bracket (19%)
- Making the most of a Qualified Longevity Annuity Contract, or QLAC, to put aside funds for later in retirement (17%)
Tax-saving strategies in retirement, explained
The majority of those tax-savings strategies boil right down to two tenets: fully utilizing all of the tax-advantaged accounts at one’s disposal after which timing distributions from those accounts to take care of the bottom tax bracket possible during retirement.
Tax-advantaged retirement accounts just like the Roth 401(k) and Roth IRA are key to keeping income tax down on retirement distributions. That’s because Roth contributions are already taxed before being invested into the account. In retirement, qualified distributions from Roth accounts are tax-free, unlike other investments, Social Security advantages and the standard 401(k).
For the rich, Roth conversions also play a vital role since the accounts have income limits, barring high-income earners from opening Roth IRAs outright. As an alternative, individuals with incomes of $161,000 or more (for tax 12 months 2024) can roll their money from traditional retirement accounts right into a Roth IRA to get across the cap. They’d should pay tax on the cash they roll over upfront — but would get to later profit from tax-free withdrawals in retirement.
HSAs even have a giant perk for retirees other than the apparent good thing about helping you cover health care expenses in retirement, though that’s significant by itself. (In accordance with Fidelity, a typical 65-year-old needs about $165,000 to cover health care costs.)
By contributing to an HSA now, you may lower your taxable income today while helping defray health care costs later in life, tax-free (as long as the cash is used for qualifying medical expenses including surgeries and prescriptions — in addition to common drug-store items like crutches, first-aid supplies and female hygiene products). Just don’t forget to invest those HSA contributions within the meantime.
For retirees, HSAs have an additional benefit: When you hit 65, the cash might be withdrawn for any purpose. Though, if it’s not for a cleared medical expense, it’ll be taxed as income.
The pliability and control over what’s and isn’t income are key.
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