Limit the Impact of Taxes on Your Retirement Savings
Another way to catch up on retirement savings is to spread your money across different types of accounts to reduce the tax hit when you withdraw it. Withdrawals from various types of accounts are taxed at different rates. “Why throw that money away in taxes if you don’t have to?” asked Neal Ringquist, executive vice president of Retirement Clearinghouse, a provider of retirement savings services in Charlotte, N.C.
Contributions to a 401k offer an upfront tax benefit because the money comes out of your paycheck before taxes, which reduces your taxable income. If you’re behind on retirement savings, don’t bypass this tax benefit. “You’re compounding dollars that would otherwise be taxed,” Ringquist said. “You need every dollar you can get.”
Withdrawals from a 401k in retirement are taxed at your income tax rate, which currently can be as high as 39.6 percent. You might be able to reduce your tax bill if you stash some savings in other types of accounts, such as a Roth IRA or a taxable brokerage account, Ringquist said.
You can’t deduct contributions to a Roth IRA, but withdrawals are tax-free in retirement. And investments in a brokerage account are taxed at the long-term capital gains tax rate — which is no higher than 15 percent for most taxpayers — as long as you hold them for at least one year. Saving some of your retirement money in these types of accounts can reduce the tax hit when you withdraw it, which means you get to keep more of the money you worked to save.
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