A tax-efficient retirement withdrawal strategy can help you maximize the after-tax income you receive during retirement. Here are some tips for a tax-efficient retirement withdrawal strategy:
Understand how taxes will affect your retirement income: You should understand the tax implications of different retirement income sources, such as Social Security benefits, retirement account withdrawals, and investment income. Tax rates and rules can change, so keep up with changes that could affect your retirement income.
Delay Social Security benefits: If you can afford to delay taking Social Security benefits until you are past your full retirement age (FRA), you can increase the amount of your benefits. This is because the benefits increase by a certain percentage each year that you delay up to age 70.
Take advantage of Roth accounts: Roth accounts allow you to withdraw money tax-free in retirement. Consider converting some of your traditional retirement accounts (such as a traditional IRA or 401(k)) to Roth accounts over time to help minimize taxes in retirement.
Manage your tax bracket: To manage your tax bracket, you might consider withdrawing funds from different types of accounts to minimize the tax impact. For example, you might withdraw from a Roth account first to avoid paying taxes on that income, withdraw from a taxable account, and withdraw from a tax-deferred account.
Plan your withdrawals around required minimum distributions (RMDs): When you turn 73, you must take a specific minimum distribution from your traditional retirement accounts each year. If you have other sources of income, you might consider withdrawing from your retirement accounts earlier than required to minimize taxes.
Consider charitable giving: If you donate to charity during retirement, you may be able to reduce your taxable income. Consider donating appreciated assets (such as stocks or mutual funds) instead of cash, which can provide a tax benefit.
A tax-efficient retirement withdrawal strategy requires careful planning and consideration of your financial situation. Consider consulting with a financial advisor (that's us) or tax professional to help you create a plan that works for you.