Avoiding the Tax Time Bomb

June 3, 2021 / Eric Peterson /

Today’s Prep:

Are you nervous about all the taxes you might have to pay in retirement? We talk through strategies you can implement now to reduce your taxes down the road.

Equipping Points:

If most of your retirement savings are sitting in a 401(k) or IRAs, you’ll need some strategies to handle the taxes you’ll have to pay when you withdraw from these accounts. On today’s episode of the podcast, Eric shares a few different strategies that will reduce your tax burden in retirement.

The tax you owe later is hard to calculate since you won’t know what taxes will be down the line. Reducing the amount you currently put into a 401(k) is one strategy, but then where should that money go? Check to see if your plan as a Roth contribution in the 401(k). Another place is to put money in the Roth IRA, as long as you are within the income limits. Doing both puts you in a great position for retirement.

Is it okay to have both a traditional 401(k) and also a Roth IRA? You can’t ever have too much saved for retirement. If you are eligible for the Roth contribution, it’s a great account to put money away in. If your income is over the limit to contribute into a Roth IRA, what are your options?

In the tax-free toolbox, there are three tools: Roth accounts, municipal bond interest, and life insurance. Life insurance proceeds are tax-free. There’s no limit to what you can put in life insurance. It can accumulate tax-free, take it out tax-free, and it passes tax-free. High income earners will use life insurance as an accumulation vehicle.

If you chose to pursue a Roth conversion, what do you need to know? How much should you convert to a Roth IRA? It really depends on how much tax you’re willing to pay. Most people want to stay under the 25 percent tax bracket. This is a conversation you should be having with your financial advisor.

Listen to the entire episode or use the timestamps below to skip ahead.

0:46 – What are tax strategies to consider?

1:11 – Reducing the 401(k) contributions.

3:22 – If you don’t have a Roth option at work, should you do a Roth IRA?

4:41 – Would funding a cash value life insurance be a good strategy?

7:48 – What do we need to know about Roth conversions?