When it comes to retirement planning, taxes can play a critical role in securing a financially stable future for you and your family. Whether investing the time to learn or partnering with tax experts to handle their taxes, taking the time to understand and proactively plan out when it is most advantageous for you to pay your taxes can put more money in your pocket in the future as taxes inevitably change.

Taxes are one of those things that at some point, everyone will have to deal with. Hence the saying “the only guarantees in life are death and taxes.” What’s the difference?  Death doesn’t get worse every time congress meets!  But as intimidating as taxes may seem, they can become second nature when you take the time to understand them fully.

Understanding Your Taxes

If you take the time to learn and understand your taxes and how they may impact your retirement lifestyle, you can begin to grasp the benefits of creating a tax plan that pays the least amount of taxes possible. Tax planning takes time, but once you’re able to achieve your goals it can become extremely rewarding.

Before you dive into the deep end of tax planning, you first have to understand where your current income places you within our progressive tax bracket system. This will help you more accurately gauge your tax liability and the resulting opportunity for making Roth contributions or doing Roth conversions. 

Benefits Of Tax Planning

After you begin to get a grasp on your taxes, it’s time to come up with your tax plan. By creating your personalized tax plan, you can help yourself achieve your tax goals and future financial plans easier. Benefits of creating your very own tax plan include:

  1. Maximizing Your Return

The biggest benefit to individual tax planning is the ability to maximize your deductions and refund to lower your current tax bill. No one knows your life as you do. That’s why taking the time to understand the different ways that you may qualify for tax breaks, credits, and deductions can help you maximize your refund. Leaving you with more money in your pocket for now and preserving more of your savings for later.

  1. Finding Deductions

Tax deductions can lower the amount of overall taxes you owe, thus leaving you with more money. Most people overlook many tax deductions that can help them save money by taking the quick route with standard deductions. As we get older and our dependents move out on their own and the mortgage gets paid down, our deductions can go away.  Today we have a very generous standard deduction, about double what it was before implementation of the Tax Cuts and Jobs Act.  As deductions go away, more of your income will be reported as income unless you have proactively created a tax-free bucket with which to supplement your monthly cash flow.

  1. Roth Conversions

The name of the game with tax planning is paying the least amount in taxes possible. If taxes trend higher in the coming decades then it may make sense to clear the tax liability now, even if you are still working.  Since federal retirees do not commonly drop 2 or more tax brackets when transitioning to their fixed income, if tax rates trend higher then it can erode the sustainability of their retirement lifestyle.  Thankfully taxes are at some of the most favorable rates we have seen for main street Americans in many years and a Roth conversion allows retirees and employees alike the opportunity to clear that liability at today’s “sale” tax rates.

  1. Roth TSP Contributions

With a traditional IRA, your contributions may be tax-deductible but you pay the taxes when you take distributions during retirement (possibly at higher future tax rates). With a Roth IRA, your future withdrawals are not taxed at all. Instead, you pay the taxes upfront, but your contributions are not tax-deductible.

Unlike a Roth IRA, the TSP offers the ability for participants to make Roth contributions regardless of the level of household income they report.  Roth IRAs phase out contributions for higher income earners.  Roth contributions clear their tax liability today and then the account would be able to compound tax-free for life.  Roth IRAs do not have Required Minimum Distributions (RMDs) but the Roth TSP does – leading many to simply transfer those funds from the Roth TSP to a Roth IRA to simply eliminate that interruption to their tax-free compound growth.

Get The Most With Walker Capital

At Walker Capital, our goal is your financial success. We offer services that include retirement planning, tax planning, and insurance planning so that your financial future stays on track and secure. We’re the right team, with the right tools to help you find financial success