Account for how your retirement account works
The timing and size of your taxable withdrawals matter. So, it’s in your best interest to fully understand the ins and outs of your retirement accounts.
First, assess what your funds demand tax-wise. “Retirement plan” is a catch-all for many different kinds of savings vehicles and accounts — and the IRS lists at least 15 different kinds.
Because Roth IRA holders use after-tax dollars to fund their accounts, they don’t have to worry about the government taking more when they’re ready to withdraw funds.
Traditional IRAs and 401(k)s by contrast use pre-tax dollars. That’s a benefit when you grow the account because it reduces taxable income each year you contribute. But it creates tax obligations when it’s time to spend the money. So it’s useful to have an idea of how much you’ll be taxed when you do eventually withdraw funds.
If a portion of your withdrawal trickles into a higher tax bracket, you’ll be taxed more on that amount. For example, if you withdraw $60,000, you’ll be taxed 12% on the first $44,725 and 22% on the remaining $15,275.
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Learn MoreMaking the most of your retirement savings
If your $1 million shows continued growth, consider tapping other financial resources before cashing in. Social Security, side hustles and downsizing rank among the popular, proven ways of roping off retirement funds until the opportune time. Beware, though, if you live in one of the nine states where Social Security benefits are taxed.
Finally, make like the rich person you are and consider hiring the right help. A top-flight financial advisor or tax accountant can cost hundreds an hour, but if they use their skills to lower your payments by thousands of dollars, call it a very wise investment.
Correction — September 5, 2024: This article has been updated from a previous version to reflect current tax rates and brackets.
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