In the decade or two prior to retirement, 40 – 50 years of age, take advantage of tax deferral opportunities and begin your retirement planning with a focus not just on accumulation, but also on managing taxes.

  • Make the best possible use of retirement investment vehicles available to you through your employment with your long-term goals in mind
  • Maximize your investments as the compounding effect of those monies will be substantial
  • Understand what your tax picture will look like well before you retire so you can plan accordingly


Create a Plan

It’s never too early to create a plan that takes into account future taxes and retirement distribution. You and your financial advisor should project the growth of your account balances and consider the various account types to illustrate potential taxes in retirement.

 

Best Use of Employer Retirement Plans

Both a traditional and Roth 401(k) have a place in your retirement portfolio, and you don’t need to choose between them. In fact, the best move may be to hedge your bets if your employer is one of the 50% of plan sponsors that offers both. With a Roth 401(k) you pay taxes up front. Once in the account, your money grows tax deferred. Then in retirement, qualified withdrawals come out tax-free.

 

Roth IRAs and Roth Conversions

A Roth IRA conversion allows an individual to transfer pre-tax dollars from a traditional IRA directly to a Roth IRA account. Anyone can perform a Roth conversion, regardless of income level. Taxes are paid on the converted dollars in the year of conversion, but thereafter, the assets grow tax-free, and qualified distributions are tax-free. Also, equally as important, there are no RMDs with a Roth IRA, thus helping to keep your income tax rates low and allowing the account to grow tax-free during your lifetime.

 

Fund a Health Savings Account for Medical Expenses in Retirement

It’s important to understand how to plan for growing medical costs. Considering increasing contributions to your tax-advantaged accounts, especially health savings accounts (HSAs), which enable tax-free spending on health care in retirement. As HAS’s triple tax advantage – upfront tax deduction, tax free growth, and tax-free withdrawals – make it a top-notch way to save for retirement medical expenses.

 

Maximize Your Contributions to Retirement Plans to Enjoy the Compounding Benefits Later

Save early and often the expression goes. Consider a three-step approach – contribute to your 401(k) up to the company match, fund your HAS to the maximum, and if possible, contribute more to your 401(k) going up to the maximum.

 

Diversify Your Retirement Savings

Now more than ever, consider tax diversification as a primary goal during these years leading up to retirement. Splitting your retirement savings among the following three accounts such as 401(k)s or traditional IRAs where you make pre-tax contributions and are taxed on withdrawals in retirement. Second, consider tax-free retirements savings plans such as Roth 401(k)s and Roth IRAs where you contribute after tax dollars that can be withdrawn tax-free in retirement. Third, consider taxable accounts where you’re taxed on interest, dividends and that at the lower capital gains rate. Creating this type of tax diversification provides more flexibility regarding how much you withdraw in retirement and from where.

To learn more about preparing for retirement or answer any questions you may have please contact Davis Capital Management’s office. We are happy to discuss what opportunities may be available to you.