Retirement should be a reward – not a tax trap.
But many families unknowingly set themselves up for massive tax bills because they know how to save, and have done a great job, but don’t know how to get the money out tax efficiently.
For decades, Americans have been encouraged to save into 401(k)s and other tax -deferred accounts. These “defined contribution” plans helped build retirement savings. You did everything right. You worked hard, said no to extras, and built up a sizable nest egg. You watched those balances grow and felt proud – maybe even a little attached.
One day you will stop working for a paycheck , and you will need to take money from the nest egg you have built . T his what we call “Your Life After Work.” Yet many families who’ve spent decades saving find themselves unwilling to touch their accounts , or they simply don’t know how to maximize the situation they are in . They believe holding on to those dollars or using money that taxes them the least today is the right thing – until t he IRS steps in.
At age 73 (or 75 if you were born on or after January 1, 1960 ), Required Minimum Distributions (RMDs) begin. The IRS requires you to take out a specific percentage each year – and that withdrawal is taxed as income. Many retirees are shocked to find they’re pushed into a higher tax bracket than ever before. That’s why it’s crucial to shift your mindset so that you are not only getting the money you need to live on but getting that money out as efficiently as possible.
This means putting your money in was just step one. Now it’s time to decide how to take it out – on your terms. Without a plan, you’re letting the government, or your heirs, make those decisions for you. The money is coming out, whether you like it or not.
Your financial journey moves through three key stages:
• Accumulation – While working, you save regularly and consistently.
• Preservation – As retirement nears, you protect what you’ve built.
• Distribution – You use money you have saved to live .
Many people see $500,000, $1 million, maybe even more, on their statements, and it hurts to think of drawing it out to live on! If you wait too long, the IRS will decide when and how you will withdraw.
Families should do the following instead:
• Think ahead. Start considering where you are saving your money now to best serve you in the future.
• Focus on your tax bracket. Try to maximize the bracket you are in through distributions, conversions, etc.
• Start with the end in mind. Make a plan that ensures your values and needs guide your financial future.
You didn’t save for retirement just to worry about taxes or lose control at the end of the game. You saved so you could enjoy your time, support your family, give to causes you care about, and live without guilt or fear.
The good news? You still have time to build a defined distribution strategy , one that turns your savings into purposeful spending, while reducing taxes and leaving a legacy that’s clean – not complicated.
Financial Enhancement Group is an SEC Registered Investment Advisor.
