Reduce Taxes on Retirement Savings
One common way to reduce your taxes is with retirement savings accounts. With a traditional Individual Retirement Account (IRA) or 401(k) plan, you contribute ‘pre-tax dollars’ or money that has not yet been taxed. Instead, you are taxed at the income tax rate when you withdraw. This may make sense if you anticipate being in a lower tax bracket at retirement.
With a Roth IRA or Roth 401(k) plan, you contribute ‘after-tax dollars’ or money that has already been taxed at your current income tax rate. Assets in the account grow tax-free and you won’t be taxed again in the future when you’re ready to withdraw. This may make sense if you’re currently in a lower tax bracket and further from retirement.
Another option is to split your savings between the two or you can even switch or convert the account type if you change your mind, although you may owe income tax on the money that year. Our financial advisors can help you plan accordingly and discuss your tax concerns including federal and state taxes on retirement accounts and potential taxes on pensions or annuity benefits.