Tax Planning

Key Tax Planning Considerations for Retirees and Those Close to Retirement

by Alli Thomas

Jul 9, 2020

Nationwide Retirement Institute recently partnered with The Harris Poll to find out how the COVID-19 pandemic may be affecting retirees and those close to retirement.

First, let’s talk about what pre-retirees and retirees were thinking about last year, before the coronavirus craziness began. The results of Nationwide’s 2019 Tax-Efficient Retirement Income Study showed that 28% of respondents were “terrified” about the impact of taxes on their retirement income—yet 39% of respondents said they don’t give much thought to the taxes they will pay in retirement. And, fewer than half of the respondents said they understood how to take advantage of taxable, tax-deferred and tax-free savings accounts.

Enter the pandemic. The latest data from Nationwide and Harris show that 59% of Americans are now thinking about how taxes will affect their retirement income.

This clearly shows that investors need more education about the benefits of tax management for their retirement savings.

With that goal in mind, here is a primer on each of these three types of retirement accounts:


Tax-deferred accounts

Tax-deferred accounts include employer-sponsored 401(k) plans, 403(b) plans, 457 plans and traditional IRAs.

  • If you believe you’ll be in a lower tax bracket in retirement than you are now, these accounts may be a good option for you.
  • Your contributions to these accounts are not taxed until you withdraw money from them.
  • You may contribute to employer-sponsored tax-deferred plans through payroll deductions—as long as you are working for the company or entity that sponsors the plan, you can put money into it.
  • You can only contribute to a Traditional IRA until you reach age 72.
  • You must take required minimum distributions from tax-deferred accounts upon reaching age 72 (which is up from age 70.5 as of the passage of the recent SECURE Act).
  • These accounts are subject to annual contribution limits, but not income limits. If you earn above a certain amount and also have an employer-sponsored retirement account, the contributions you make to a traditional IRA may not be tax-deductible. However, you can still contribute to the IRA anyway for the benefit of tax-deferred investment earnings.


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Tax-free accounts

Tax-free accounts include Roth 401(k), Roth 403(b), Roth 457 plans, and Roth IRAs.

  • If you think you (or your beneficiary) will be in a higher tax bracket at the time of withdrawal than you are now, these type of account may be a good option for you.
  • You contribute money to these accounts that you have already paid taxes on, but under certain conditions, you will not pay taxes on withdrawals from these accounts.
  • There is no required minimum distribution age for a Roth IRA (but the RMD does apply to employer-sponsored Roth accounts—which you could opt to take and roll over to a Roth IRA in order to keep it invested).
  • There is no age limit to contribute to a Roth IRA. You may hold on to it until you die without tapping it, at which point your beneficiary will receive the account and can take tax-free withdrawals from it.
  • The Roth IRA is subject to annual contribution limits AND income limits. In other words, you can’t contribute to a Roth IRA if you earn over a certain amount.


Taxable accounts

Taxable accounts include brokerage accounts.

  • There are no tax benefits (either today or in the future) for funding taxable accounts.
  • However, they are generally more flexible than either tax-deferred or tax-exempt accounts.
  • There are no contribution limits and no penalties on withdrawing money from these accounts.
  • There are, however, capital-gains taxes you’ll pay when you withdraw from these accounts. If you’ve held your investment in a brokerage account for less than one year, a withdrawal will be subject to short-term capital gains (which can be high—up to 37%). If you’ve held the investment for more than one year and withdraw it, it will be taxed at a lower rate, called long-term capital gains. Depending on your tax bracket, that rate could be between 0% and 20%.

Many financial experts agree that strategic tax planning is the way to go when investing for retirement. Depending on a number of factors that are unique to you, contributing to a combination of tax-deferred, taxable and tax-free accounts can reduce your tax bill in retirement.

Most folks have a hard time figuring out how to contribute across different types of accounts. Working with an experienced financial advisor can simplify the process, and a good advisor can make sure that you are properly diversified. Our advisors are available for a free consultation on your retirement tax planning strategy! Click here to set up a no-obligation meeting today.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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