INSIGHTS

As Benjamin Franklin once said: “In this world, nothing can be said to be certain, except death and taxes.” When you’re nearing retirement or already enjoying it, the last thing you want is to see your hard-earned savings eroded by excessive tax payments. Yet, many retirees unknowingly overpay taxes on many of their investments.
This article is crucial to your financial well-being as it explores how you can avoid these common tax pitfalls and strategies to help you save more of your hard-earned wealth from multiple levels of taxation.
If you’re concerned that you either don’t have an effective tax strategy in place or need to update your current financial strategy based on recent life events that have changed your financial situation, this article will explore four common ways you might be overpaying taxes, along with strategies to help you save more of your hard-earned wealth from multiple levels of taxation. By avoiding these common pitfalls, you can experience a sense of relief and keep more of your retirement money.
As a fiduciary financial advisor in Houston, our team offers highly personalized tax planning services to affluent individuals and families. With our extensive experience and expertise, we can help you navigate the complex world of taxes and ensure you’re making the most of your retirement savings.
Not Taking Advantage of Tax-Deferred Accounts
One of the most significant tax advantages available to you as you plan your retirement are tax-deferred accounts like IRAs and 401(k)s. However, two common mistakes may occur:
- Many don’t maximize contributions to these accounts during their peak working years
- Some begin withdrawing too early, which can lead to unnecessary tax liabilities and reduced asset values later in life
Solutions:
Maximize Your Contributions
If you’re still in the workforce, consider maximizing your 401(k) or IRA contributions. The more you contribute now, the more your investments can grow tax-deferred over longer periods, potentially saving you thousands in taxes.
- For 2024, the IRS has announced the following contribution limits for retirement accounts:
- 401(k) Plans: The contribution limit has increased to $23,000, up from $22,500 in 2023. If you are 50 or older, you can make an additional catch-up contribution of $7,500, bringing your maximum contribution to $30,500.
- The contribution limit for IRAs, including Traditional and Roth IRAs, has increased to $7,000 for those under age 50. For individuals aged 50 and older, the catch-up contribution remains at $1,000, allowing a total contribution of $8,000.
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Consider Moving Funds from a Traditional IRA to a Roth IRA
A Roth IRA conversion involves transferring funds from a traditional IRA or another pre-tax retirement account into a Roth IRA, paying taxes on the converted amount in the year of the transfer but allowing the money to grow tax-free afterward. The converted amount is added to your taxable income for that year, which can increase your tax bracket and liability.
Solution:
By converting assets from your traditional IRA to a Roth IRA, you pay taxes at the time of the transfer but eliminate all future tax liabilities on that portion of your retirement savings. Conversely, keeping the funds in a traditional IRA would result in ongoing tax liabilities as you withdraw funds, potentially leading to higher cumulative taxes if tax rates increase or your retirement income keeps you in a higher tax bracket. The optimum results are attained by timing your R
Overlooking Required Minimum Distributions (RMDs)
Once you reach age 73, the IRS requires you to take Required Minimum Distributions (RMDs) from most retirement accounts, including traditional IRAs and 401(k)s. Failure to take these distributions can result in hefty penalties—up to 50% of the amount that should have been withdrawn. Equally onerous, the income from RMDs is fully taxable, which can push you into a higher tax bracket.
A fiduciary Houston, TX, financial advisor can help you navigate the complex rules around RMDs and create a withdrawal strategy that minimizes the tax impact.
Solutions:
- Start planning for your RMDs several years before you turn 73. By strategically managing withdrawals and considering Roth conversions, you can reduce the size of your RMDs and lower your taxable income.
- If you have a large IRA balance, consider converting some of it to a Roth IRA before you reach the RMD age. Roth IRAs are not subject to RMDs, and the withdrawals are tax-free, making them an excellent tool for reducing future tax liabilities.
Mismanagement of Investment Earnings
Investment earnings, such as dividends, interest, and capital gains, can be a significant source of income in retirement. However, if not managed properly, it can lead to unnecessary taxes.
For instance, selling an appreciated asset at the wrong time could trigger a large capital gains tax bill. Or, not all dividends are taxed equally—qualified dividends are taxed at a lower rate than ordinary income.
A fee-only financial planner in Houston can review your investment portfolio and recommend adjustments to help you manage investment income more efficiently and reduce your overall tax burden.
Solutions:
- Use tax-loss harvesting to offset gains with losses. By selling losing investments, you can reduce your taxable capital gains, potentially saving a significant amount in taxes.
- Holding investments for more than a year qualifies for long-term capital gains tax rates, generally lower than short-term rates. This simple strategy can help you keep more of your investment income.
- Invest in tax-efficient funds or ETFs that aim to minimize taxable distributions. These funds typically employ strategies to reduce capital gains and dividend payouts, which can lower your tax liability even more.
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Neglecting State Taxes and Estate Taxes
While federal taxes get most of the attention, state taxes can also take a significant bite out of your retirement savings. For example, Texas has no state income tax, a big advantage for retirees. However, estate taxes can still be an issue, especially if you plan to pass on a substantial estate to your heirs.
Solutions:
- Create an estate plan that includes a will, trust(s), and charitable giving strategies to minimize estate taxes and ensure your wealth is passed on according to your wishes. Trusts can be particularly effective in reducing the taxable value of your estate, thereby reducing the estate tax burden.
- Take advantage of the annual gift tax exclusion to transfer wealth to your heirs tax-free. This can reduce the size of your estate and, in turn, the potential estate taxes.
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