Explode Your Tax Savings?

James E. Moniz |

Discover 3 Commonly Overlooked Opportunities…Before Congress Takes Them Away

You’ve been doing everything right when it comes to retirement savings. As soon as you could, you began contributing the maximum amount to your retirement plan. You have followed the strategy, year after year. But there’s one big problem.

You might have a tax target painted right on your back because of your current savings strategy.

Too much in pre-tax retirement accounts may lead to a significant tax burden later.
Most Americans who are contributing to retirement plans receive a current tax deduction for their contribution. But, when you’re old enough to start taking money out, the entire amount of your withdrawal is taxable at your future income tax rate.

Explode Your Tax Savings | Northeast Wealth Management MA

The goal is that when you’re no longer earning income, your tax rate should be lower.
With the current top tax rates at 37%, the standard strategy might not work the way it’s intended. In modern times, the top tax rate has fluctuated between 28% and 50%. This could potentially cause you to defer tax at a 37% tax rate only to have to pay tax at 50% if tax rates go up!

Some wealthy folks have figured out some commonly overlooked strategies to reduce their taxes by tweaking their current saving strategy. One is to contribute to a tax-free Roth account. You don’t get this year’s tax deduction, but if you follow the rules, you can take the money out tax-free when you’re older.

These techniques, especially Roth conversions, are often used by wealthy taxpayers. And the strategies are a target for legislative change.

You’ll also want to have already maxed out salary deferrals, IRA contributions, and have extra cash you’d like to stuff into your retirement nest egg and pay any taxes owed.

The total contribution for defined contribution plans such as a 401(k) is set each year, including catch-up contributions if you’re over age 50. When you add up maximum salary deferrals and any employer matches, you could still have thousands to add in after-tax contributions ($45,000 or more for some), if your plan allows.

Fortunately, for the time being, you can follow the lead of wealthier taxpayers and convert some of that money into tax-free Roth accounts. 

Once you’re ready to execute your strategies, you’ll need to ensure that you’ve got everything properly set up. While these arrangements are not that hard to understand at a high level, making sure that they’re implemented correctly can be more of an undertaking than you might think.  As always we recommend you consult with a tax professional prior to making any changes.

Next month we will focus on tax changes coming, and the current impact to your family if they inherit qualified plans.