Tax Reduction Strategies

​1. Pay Yourself First

The utilization of company retirement plans (401-k's and Simple IRA's) are the easiest way to build up tax advantaged assets for your retirement goals. Verify that you are contributing the amount required in order to maximize the employer's match. Above that amount it would usually be prudent to try to contribute the maximum amount possible in order to minimize your income tax liability.

If you are self-employed or your employer doesn't have a retirement plan, an Individual IRA, a Simple or Individual 401-k would allow you to save for toward your retirement and give you tax incentives for savings as long as you are within income limits.

​2. Super Savings

Contributing to a Roth IRA is another avenue of saving for retirement. Roth IRA contributions are after-tax and therefore can grow and be withdrawn tax-free upon retirement. If you are in the 15% Federal bracket, you might consider the use of a Roth IRA for the excess above the employer match as it avails you of the access to the amount invested in the Roth IRA Tax-Free and penalty free at any time. At age 59 ½ the earnings are also tax and penalty-free.

3. Withdrawal Strategies

Between the age of 59 ½ and 70 ½ is the usual time to make a plan as to the tax strategies that may be employed to minimize the taxability of the distributions on the taxable retirement plans. The most common choice would be the utilization of a Roth Conversion. This would allow for a systematic transfer of the taxable proceeds to the Roth IRA, where it will grow tax-free. The amount that is taxable income the year it is converted. This process (especially in low income years) could result in substantial savings in the future. Once distributions from the taxable account commences, it is crucial to have your tax professional run projections to see how much is possible to withdraw without moving into a higher tax bracket.

4. Social Security

The "wild card" will be the impact larger distributions have on the amount of Social Security that is taxable. Social Security could be non-taxable, 50% taxable or 85% taxable on the 1040. You will need to run several projections to determine what the "sweet spot" is in order to pay the least amount of taxes possible.

5. Coordinated process

Finally your "best" tax reduction procedures may require a coordinated process of liquidating a non-IRA, a Roth IRA and your IRA or 401k plan. This is where the help of professionals is critical. The time and cost of this planning will pay you dividends in the long term.