Retirement has the potential to be the best time of your life, but not having enough money saved could end up making it the worst and full of fear and stress. Financial troubles can make some new retirees even regret hanging up their hat. What they had hoped would be a relaxing vacation can quickly turn into a nightmare.
If you think you’re too young to begin thinking about retirement, think again. The earlier you’re able to start saving for it, the better off you will be. If you want to enjoy your golden years, you need to maximize your retirement savings and get time and compounding working for you!
A qualified estate planning attorney and CPA are important for helping you get the details of your individual sitiation squared away. With that said, here are several useful tips that come up over and over when looking into the topic of retirement. I hope some of these can help you make the most of both your retirement savings and your retirement.
Tip #1: Don’t Take Early Withdrawals
By taking distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty. OUCH!
To avoid penalties and taxes taking their toll on you account, you should try everything in your power not to take early withdrawals. The longer you keep your money in the account, the more your investment can grow.
Tip #2: Don’t Touch Your Roth IRA Earnings
With Roth IRAs, there are a bit more rules to withdrawals. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.
But to withdraw earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings defeating the purpose of the Roth and taking on additional fees.
While it is acceptable to dip into your Roth IRA contributions to pay for an emergency, we all know life happens, you should not touch your earnings unless it’s absolutely necessary.
Tip #3: Convert to a Roth IRA
If you have money in a traditional IRA or 401(k), the useful move is to convert your accounts to Roth IRAs.
With a traditional IRA, you will eventually be forced to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them, the government sort of got to invest long term with you and reap the rewards with you huh?
A way to get out of RMDs is to convert your account to a Roth IRA. Unlike traditional IRAs, you are not required to take distributions from your Roth account, so you can let your investments grow as long as you want.
When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s typically worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions. This is a great topic to bring up with your CPA to see if a conversion would be beneficial for you.
Tip #4: Keep Your Distributions as Small as Needed
If your money is in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which can be even more costly in taxes.
Tip #5: Generate Passive Income Through Rentals
One of the most underused retirement strategies is investing in rental properties. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.
That means for those who already have the know how and invest in real estate have a great option here. Once you’ve landed those great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings with the tax benefits afforded you by checkbook control, meaning you have complete control over how you invest.
This last tip as well as all are excellent options if utilized the right way. Make sure to consult with your lawyer, CPA, or other tax professional before making these important changes to your future.