On Thursday, January 14th, Advice Chaser hosted a lunch hour webinar with financial planner Dave Zaegal, on the topic “Investments and Taxes in Retirement.” We talked about how to invest for retirement, how to minimize your tax burden, and how to protect your spouse’s finances if something happens to you.
On that note, let’s talk a little about retirement planning.
Funding Your Retirement by Investing
Some of your retirement will be paid for with Social Security. However, your Social Security payment may not cover your needs, especially with the program itself facing an uncertain political future.
That means you have to save for retirement. But it isn’t enough simply to save your money; you need to grow it. A static bank account will lose value to inflation over the years. Investments allow you to grow your retirement fund every year, so it’s the amount you need by the time you retire.
How much should you be saving? It depends on what you make now and how much you expect to need. Experts recommend investing five to ten percent of your income, and expecting to need 75% to 100% of your current salary each year of retirement. This retirement calculator can help you see if you’re on track.
How to Minimize Taxes on Your Retirement Investments
Traditional IRAs and 401(k)s are tax-deferred, meaning you don’t pay income tax on any money you save in one when you pay taxes this year, but you will pay taxes when you withdraw the money later. There is a limit on the amount you can invest in one of these accounts, which is $6000 this year for most people.
Conversely, tax-exempt accounts, like Roth IRAs and Roth 401(k)s, aren’t tax-deductible now, but you can take money out tax-free. That means you may end up saving more tax money in the long run, because the money will increase during the years it’s in the account.
Advisors recommend a tax-exempt account if you’re already in a low tax bracket now. You’ll pay income tax on the money you save in your Roth IRA or 401(k), but because of your low tax bracket, it won’t be that much. And you’ll be saving yourself a great deal on taxes later. But if you’re in a high bracket, it may make sense to use a tax-deferred account, because the amount you are able to deduct can shift you into a lower tax bracket.
What If You Die Before Your Spouse?
In retirement, it’s safe to assume one of you will probably pass first. If that happens, you’ll want to make sure each of you inherits the other’s retirement account.
401(k)s automatically devolve to your spouse on your death, even if you don’t sign any paperwork. An IRA, however, will go to whomever you name as the beneficiary. If you want your spouse to receive the money, make sure you name them in your IRA paperwork.
After a spouse passes and the account goes to the survivor, the survivor has a few choices. They can simply cash out the plan, which may involve a large tax bill all at once, but be tax-free thereafter. They can leave it in the existing plan, which means the required minimum disbursements are based on the deceased owner’s age. Or they can roll it over in a new or existing plan.
Keep in mind that rolling a traditional 401(k) or IRA into a Roth 401(k) or IRA will require the survivor to pay tax on the funds. So having your money in a Roth account can greatly reduce the tax burden on your spouse after your death.
Hungry for More?
Learn about 401(k)s, IRAs, taxes, survivorship and more in our webinar. We’ll go much more in-depth, and you’ll have the opportunity to ask questions. Retirement investing can be confusing, but it doesn’t have to be. Visit our YouTube channel to watch the recording of our informative webinar.