When most people plan for retirement, tax planning is not one of their major concerns. After all, paying taxes might seem like an unavoidable consequence of earning money. This is true, but there are ways to reduce your tax debt in retirement. If you manage to accomplish this, you get to keep more of your money at a time when you might have a very limited earning capacity.
The good news is that there are several retirement vehicles available for you to choose from. Some of these are not traditional retirement accounts and might surprise you.
Why you need an HSA and FSA
NerdWallet reminds retirees-to-be that health savings accounts and flexible spending accounts remain exempt from taxes. In your younger years, you might feel reluctant to tie up your money in accounts that serve only one purpose. Keep in mind that as you age, you may face more medical complications and need to pay for rising health care costs. Should you not use all the money in the account, it may form part of your estate.
Why you need multiple retirement accounts
There are two main options when choosing traditional retirement accounts: 401ks and IRAs. Employers usually provide 401k accounts and might offer matching contributions. Once you max out your 401k contributions or if you are self-employed, consider IRAs. You can pay your taxes upfront with a Roth IRA or you can take the traditional route and pay taxes in retirement.
Why consider a 529 account
Many grandparents contribute to education expenses or even return to school during retirement. Will you? You can set money aside in a 529 account to make this possible. Note that 529 accounts may also pay for other qualifying educational expenses before college, such as private tuition. Unfortunately, 529 plans are not always tax-deductible at the federal level, but you may find plans deductible at the state level.
There is no one tax planning retirement strategy that works for everyone. You need to consider your tax bracket now versus what you think it might look like in retirement. Also, take your current health, predicted life expectancy, future goals and lifestyle plans into consideration.