Financially speaking, the biggest difference between your working years and your retirement years is that during retirement, instead of being able to contribute part of your income to tax sheltered investment accounts, you now will be withdrawing those tax deferred investment accounts. Consequently, in terms of taxes, your situation is upside during the time that you’re using this retirement income.
If you have a 401K or other type of employer based retirement savings account, then you may want to consider rolling that over into a tax deferred IRA, as long as you are at least 59 ½. Once you begin withdrawing that money, you will be hit with taxes on those withdraws. Rolling over your 401K to a traditional IRA is a good idea, but remember, if you do, do not have the funds sent to you. Have the funds from your 401K sent directly to your IRA broker. Any monies handled by you directly during the rollover transfer will be subject to the withdraw criteria and taxes.
If you hold any company stock in your 401K that has a very high value, before taking any of the distributions from your plan, transfer that stock to a taxable fund then put the remaining 401K monies into an IRA. The advantage here is that the stock you rolled over into a taxable account is taxed based on ordinary income taxes based on its historical value plus, the withdraw qualifies for a 15% long-term capital gains rate. To understand, what you are doing is avoiding the highest portion of your 401K to be subjected to the highest income tax rates.
If you have some time before you begin your golden years, look into a Roth IRA. These very valuable investment vehicles will allow you to enjoy retirement on a tax-free basis. Another benefit to the Roth is that unlike traditional vehicles, you do not have mandatory withdraw rules, your money can stay in the IRA for as long as you want it to.
Time your social security benefits with your tax deferred investments. You have the option to delay receiving your social security benefits up to the age of 70. The benefit here is that you can plan your social security benefits to match your best income rate from your investments. They way taxes on social security benefits work is that those with two incomes (single individuals with more than one retirement benefit) between $25,000 and $34,000 will pay tax on 50% of their benefits. Those with incomes above $34,000 will have to pay income tax up to 85% of their benefits. Couples who file a joint return with incomes between $32,000 and $44,000 pay tax on 50% of their benefits. Married couples who earn more than $44,000 pay up to 85% of their earnings they receive from social security. Therefore, receiving your benefits when your monies are rolled into a tax deferred or tax sheltered investments will enable you the most return on the social security benefits.
Whatever age you choose to retire, your retirement income will be taxed based on the rate you are in at that time, not the rate you were in while earning it. What will also figure into your tax bracket factoring is where you live, what state and what their tax laws are. This is the reason Florida is so popular with retirees; Florida has a very good tax program for retired people. Each year your income tax bracket will be assessed based on your earnings. Deferring that retirement income for as long as you can is your best tax advantage.