Spotlight

Spotlight

Looking to retire? You'll still have to pay taxes - here's how to plan for them.

Posted April 20, 2021 5:00 a.m. EDT
Updated April 20, 2021 2:40 p.m. EDT

Each state has different rules and regulations when it comes to taxing retirees. In North Carolina, for example, Social Security benefits aren't taxed, but other retirement incomes like pension are usually subject to some amount of taxation. (Lusya/Big Stock Photo)

This article was written for our sponsor, Capital Financial USA.

Each state has different rules and regulations when it comes to taxing retirees. In North Carolina, for example, Social Security benefits aren't taxed, but other retirement incomes like pension are usually subject to some amount of taxation.

For those worried about how much money they'll be left with after retirement and how taxes will affect their income, a financial adviser can help set your finances on the right path.

Peter "Coach Pete" J. D'Arruda of Capital Financial Advisory Group — a company that specializes in wealth management through investment, financial, retirement, estate and tax planning — recommends people start a 401k or Roth IRA as soon as possible in order to maximize their retirement nest egg. However, both a 401k and Roth IRA offer different tax treatments.

"Imagine you were a farmer out in the field planting your seeds for the year, and you see a big, black SUV pull into the farm. Out pops a few government officials in black suits, and they say, 'Hey, we're going to give you a choice,'" D'Arruda said. "First, either we'll tax them on a little bag of seeds and we'll never come back again. Or, we'll be back every single year at harvest and tax you on old harvest. Which option are you going to pick?"

401ks operate much like the latter option. With an employer-sponsored retirement program, contributions to 401ks are made pre-tax, meaning income tax isn't deducted from your paycheck before it goes into the account. However, once you're ready to pull money out of your retirement account, withdrawals from your 401k will be subject to the current tax rate. Many employers offer a match rate for 401ks, making it a simple strategy for boosting your savings.

Another retirement savings option, the Roth IRA, is set up between an individual and investment firm. There's greater freedom with investment options, and since contributions don't warrant any tax deductions, the money can be withdrawn tax-free once you hit retirement.

When it comes time to pay taxes, having both types of accounts can help retirement-age individuals cover all of their bases.

"It's always an intimidating time when it comes to filing taxes. We like to do tax planning, which is basically looking ahead to protect your behind from the tax man. When anybody starts taking money out of their retirement accounts, we need to decide which accounts we should take the money out of and which accounts should be left alone," D'Arruda said. "We always recommend converting regular IRAs and 401ks to a Roth IRA. You have to pay the taxes on the conversion — and we run the numbers to see if that makes sense — but many people would benefit. That's why they need a qualified person who understands the tax navigation strategy."

In addition to strategically planning the types of investment methods you utilize, Coach Pete also recommends thinking about what sort of deductions you might qualify for. Oftentimes, people are eligible for certain deductions without even realizing they're able to claim them.

Home office deductions, self-employment deductions and energy-efficient credits are common deductions that might apply to retirement-aged individuals.

"Maybe they have a hobby that we can turn into a business, and they can write some stuff off in that area. Real estate is a good option, as well," D'Arruda said. "When it comes to tax navigation strategies, everybody's different. We need to see what kind of money they have, where it is, and how to take it out properly. In doing so, we make sure that you utilize all of the deductions available, you're taking out the right money from the right places, and you're saving the right way to begin with. That way, you'll benefit in the end."

This article was written for our sponsor, Capital Financial USA.

Our commenting policy has changed. If you would like to comment, please share on social media using the icons below and comment there.