Joel Johnson, a certified financial planner, provides some tips on what you should do to make sure you have a comfortable retirement in today’s tough economy.
- Delay Social Security benefits: Even if they’re not fully taxable, Social Security benefits are fully counted as income in determining your eligibility for subsidies. That means that you may want to delay taking them until at least age 65 since they grow at about 8 percent a year. Where else can you get that kind of a return without taking risk?
- Delay withdrawals from taxable retirement accounts: Taxable withdrawals from your 401(k) will also reduce your subsidies. Try to delay dipping into these as long as possible.
- Contribute or convert to Roth accounts: If you want to be able to tap into your retirement accounts, you may want to see if it’s worth contributing to a Roth IRA or a Roth 401(k), or converting existing pre-tax balances to a Roth. That’s because qualified distributions from a Roth account are not included in your modified adjusted gross income. Just be aware that withdrawals from a converted Roth IRA may be subject to a 10 percent penalty if taken within the first five years of conversion.
- Sell losses first: Capital gains are included in your modified adjusted gross income so try to sell losses for income first. This can also reduce your tax liability since you can deduct up to $3,000 a year in losses from your ordinary income taxes and carry the rest forward indefinitely. Just be sure to re-balance afterwards in order to maintain your asset allocation. You can do so within your retirement accounts to avoid creating more tax liability.
- Prioritize your retirement accounts for tax-efficient investing: You’ll want to be doing this anyway to minimize your tax liability, but it becomes even more important when taxable interest, dividends and capital gains can increase your health insurance premiums. Municipal bonds should be held in taxable accounts, but be aware that they are tax exempt interest does count in determining modified adjusted gross income, so you may want to switch to taxable bonds and keep them in your retirement accounts.
For more information, visit www.johnsonbrunetti.com.