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Tax Efficiency in Retirement

May 16, 2023

Striving for Greater Tax Efficiency in Retirement: Understanding the Impact of Social Security Benefits and Investment Choices

When planning for retirement, achieving greater tax efficiency is a goal for many individuals. It is essential to have a clear understanding of how your retirement income is generated and how Social Security benefits will affect your taxable income. Moreover, comprehending the differences between pre-tax and after-tax investments can empower you to make informed decisions about your retirement strategy.

Pre-tax investments, such as traditional Individual Retirement Accounts (IRAs) and 401(k)s, offer the advantage of contributing funds that have not yet been subjected to taxes. These contributions are tax-deductible, and the money accumulates on a tax-deferred basis. However, it's important to note that once you reach the age of 73, you will be required to take required minimum distributions from these accounts, which will be taxed as ordinary income.

For the tax year 2021, it is crucial to understand the income thresholds associated with the tax deduction for a traditional IRA. For married couples filing jointly, the tax deduction is phased out for incomes between $105,000 and $125,000. For single filers, the phase-out range is between $66,000 and $76,000.1 This information becomes vital in crafting a retirement strategy that aligns with your financial circumstances.

Alternatively, considering an after-tax investment like a Roth IRA can also be a wise choice. Contributions to a Roth IRA are made with after-tax dollars, meaning you have already paid taxes on the money. However, the benefits lie in the fact that the funds in a Roth IRA can experience tax-free growth, and withdrawals can be taken tax-free and penalty-free once you reach the age of 59½ or meet certain other conditions.

Similar to the traditional IRA, it is important to be aware of the income thresholds associated with contributing to a Roth IRA in 2021. For married couples filing jointly, contributions to a Roth IRA are phased out between $198,000 and $208,000, while for single filers, the phase-out range is between $125,000 and $140,000.2 Understanding these thresholds will help you make the most appropriate investment choices for your retirement needs.

When considering any modifications to your retirement strategy, it is strongly advised to consult with tax, legal, or financial professionals. Their expertise and guidance can provide personalized insights that align with your specific circumstances, ensuring that you make well-informed decisions.

It is important to note that the information provided in this material is not intended as tax or legal advice. While every effort has been made to present accurate information, it is advisable to consult legal or tax professionals to obtain specific details regarding your individual situation. The content presented here is based on sources believed to be providing accurate information but should not be utilized to avoid any federal tax penalties.

This material has been developed and produced by FMG Suite, an independent entity. FMG, LLC is not affiliated with the named broker-dealer or any state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general informational purposes only and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite. 

1., November 16, 2020
2., June 26, 2021