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Avoid These Tax Mistakes in Retirement

Man doing finances and calculate about cost to real estate investment and in other, tax system.Time for Taxes Money Financial Accounting Taxation Concept

Quick question: Do you think you'll pay fewer or more taxes in retirement? If you said fewer, brace yourself – because you may not like what you're about to hear.

Most people believe they'll pay less in taxes in retirement. After all, they're no longer getting a paycheck every two weeks. Unfortunately, this won't be the case for most hardworking Americans. Why? Because you may pay taxes when you withdraw money from your IRA and 401(k), receive Social Security benefits or take money from your investment accounts.

The reality is you could end up paying even more in taxes when you're retired – and these taxes could be your largest expense in your later years. This happens when people make one or more of these three critical tax mistakes:

Tax Mistake #1: You don't have a strategy to withdraw money from your IRA and 401(k)

You may not realize it, but you could be paying a lot more in taxes on your tax-deferred accounts than you know. And those higher taxes take a bigger bite than planned out of your retirement income, leaving your retirement savings at a fraction of what it is today. You can't just withdraw money from your IRA or 401(k) because you'll get clobbered by taxes when you do. Creating a smart strategy to withdraw this money before you retire could help you save thousands of dollars in taxes every year.

Tax Mistake #2: Forgetting you could pay taxes on Social Security benefits

People are frequently surprised to learn they could pay taxes on their Social Security income. They check their estimated benefits and see how much money they're eligible to receive, then count on that income to be there when they need it. However, you could end up paying taxes on as much as 85% of your Social Security benefits.1 The good news is there are a handful of strategies to help you reduce or even eliminate these taxes, but the key is to deploy these strategies before claiming Social Security.

Tax Mistake #3: Overlooking tax diversification

You've most likely heard about investment diversification – but have you heard about tax diversification? Essentially, tax diversification is not putting all your eggs in one basket. Putting all your retirement savings in one type of account could trigger a mountain of taxes in retirement. Instead, you should put your money in a strategic mix of taxable and non-taxable accounts.

The best thing you can do for your retirement is look for a financial advisor who incorporates tax planning into your overall plan. Smart tax planning today could help you save tens of thousands of dollars in taxes tomorrow – and ensure you have enough money to last throughout retirement.

1 SSA.gov. "Income Taxes and Your Social Security Benefit." https://www.ssa.gov/benefits/retirement/planner/taxes.html Accessed Nov. 30, 2021.

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