Get the Most Out of Your Retirement Planning and Tax Strategies
- The Noble Group
- Aug 13
- 9 min read
Managing retirement strategies and creating goals can help you stay focused and consistent in your financial efforts. It creates a sense of achievement while you make progress toward the pursuit of a fulfilling retirement and financial independence. However, managing retirement funds and their tax implications can be complex and daunting, especially while trying to stay on top of the ever-changing world of finance, the revision of tax laws, and an unpredictable market.
There are a variety of beneficial retirement funds that you can consider depending on your risk tolerance, your income, the time you have left until you retire, and how you hope to spend your retirement. There is no one right way to invest in retirement as everyone’s circumstances are different.
An effective way that retirement funds work together is that they create portfolio diversity and are impacted differently from a tax standpoint. Financial decisions depend on such details as income level (and therefore your tax strategy), your long-term objectives, estate planning goals, and other financial concerns.
Popular funds for people saving and trying to grow their retirement nest egg include:
Stocks
Basics of stocks – Stocks are the percentage of ownership in a company.
How are stocks taxed? – Any profit you make on the sale of a long-term asset (held for more than a year) is taxable at 0%, 15%, or 20% capital gains tax rates, depending on income limits. If you held the shares for a year or less they are taxed at your ordinary tax rate.
Exchange-traded funds (ETFs)
Basics of ETFs – A pooled investment security that is bought and sold like a stock, however, they differ in that they are a collection of different investment vehicles such as companies or government bonds, etc., structured to track various sectors of the market. Some ETFs focus on for example: large, medium, or small-cap growth stocks; short-term treasury bonds, tax-exempt bonds, the S&P 500, the total stock market, the total world stock market and many more.
How are ETFs taxed? – ETFs are taxed on dividends, capital gains, or interest, all are considered income. There are generally five conditions that could impact and determine your tax treatment.
Type of ETF – Not all ETFs are created equal, and the type of ETF will determine the tax treatment. A financial professional can help you navigate the impact on your financial strategy should you be subject to specific taxes.
Net investment income tax – If you are a high-net-worth individual, you could be subject to a 3.8 net investment income tax on the sale of an ETF.
Length of holding period – If you hold an ETF for under a year, the profits earned are considered a short-term capital gain and taxed at a higher rate than if you held it for a year or longer.
Wash sale rule – If you sell an ETF and turn around and buy a similar one within 30 days, the wash sale rule comes into play which means you can’t use the loss to offset another capital gain.
ETF dividend – If you hold an ETF for more than 60 days before the issuance of a dividend, it is considered a qualified dividend and taxed at a rate between 0% and 20%. If held for less than 60 days, it is taxed at your ordinary income tax rate.
Dividends
Qualified dividends are taxed at long-term capital gains rates, and non-qualified dividends are taxed as ordinary income.
Real estate investment tryouts (REITs)
Basics of a REIT – REITS are a fairly low-risk investment opportunity that offers a margin of safety with the potential for future growth.
How are REITS taxed? – Dividends generated from REITs are taxed as ordinary income at the investor’s marginal tax rate rather than the qualified dividend rate.
Social Security
The basics of Social Security – If you worked and paid into Social Security for at least ten years you are eligible for retirement benefits. You can start collecting Social Security benefits at age 62, however, if you are able to delay taking your benefits, the longer you wait until age 70 the benefits will increase.
How is Social Security taxed? – Social Security Tax is essentially the adjusted gross income (AGI) plus non-taxable interest, plus ½ of Social Security benefits, if the number is above the specified amount for the tax year you have to pay federal income tax. There are different percentages of your Social Security benefits that you have to pay depending on marital status and income level. Keep in mind also that there are 12 or 13 states that also tax SS benefits.
Both employers and employees pay a percentage of their wages up to a taxable maximum, whatever it might be that year. Self-employed persons pay both percentages, for example, in 2024 employees and employers paid 6.2 percent of wages. Self-employed pay 12.4 percent.
If Social Security is your only source of income, there is no tax.
Review your tax situation periodically
As life happens, certain events could trigger a tax event such as working past retirement, deciding to tax Social Security, and dealing with the changing costs of healthcare. Or the tax law itself may change which could impact you--for example, if the income brackets change, bumping you into a higher bracket, the percentage of tax you pay could increase. Depending on what type of plan you have, you will pay taxes differently.
Tax-Deferred Savings Plans with Tax Liabilities in the Future
A tax-deferred savings plan is an investment account that allows a taxpayer to postpone paying income taxes on the money invested until it is withdrawn. The day you start working you most likely are enrolled in some kind of retirement plan. If you are, for example, over 40, you are hopefully familiar with whatever kind of plan you have from a 401(k) to a 403(b), 457(b), or a traditional IRA.
The retirement account that most people are familiar with is the 401(k), typically a pre-tax strategy offered by private companies (for-profit businesses) that allows employees to contribute money up to a maximum limit. With a 401(k) you generally can’t choose any investment that you want. Many employers offer matching contributions that help grow their savings. For workers aged 50 and over, there is an annual catch-up contribution to help increase their savings as they are on their last lap in the workforce before retiring. Catch-up contributions also have an annual limit. The 401(k) is very similar to the 403(b) (offered by public schools, churches, and certain 501(c)(3) tax-exempt organizations and 457(b) (offered by certain state and local governments and certain tax-exempt nongovernment entities within Internal Revenue Code Section 501) in the benefits that are offered. Withdrawals from 401(k)s are taxable in retirement and after a specific age, you have required minimum distributions (RMDs) that you must withdraw from your account.
There are several differences for example the 401(k) and 403(b) provide financial hardship withdrawal (subject to a 10% early withdrawal penalty) whereas the 457(b) has an unforeseen emergency withdrawal option (with no 10% early withdrawal penalty). For the maximum annual plan contribution (the total amount contributed by both you and your employer), the 401(k) and 403(b) plans are the lesser of, 100% of compensation or a specified amount. The 457(b) is the lesser of, 100% of compensation, or a specified amount (but lower than the 401(k) and 403(b) which is the same amount). There are other important details that come into play so it is critical you discuss how each plan or plans that you have work and impact you.
You do want to keep in mind that withdrawals are subject to taxation and your future tax rate will determine how much the value of your retirement savings could decrease.
Can you contribute to a 401(k), 457(b), and 403(b) at the same time?
The answer is yes. If you hold multiple jobs and have different retirement plans, you can participate in them as long as the eligibility requirements are met and you adhere to the IRS contribution limits for each plan. If you do have multiple accounts, specific accounts would be more beneficial to have together than others. For example, consider this hypothetical:
Plans Maximum employee contributions per year
401(k) + 457(b) $23,000 + $23,000 = $46,000
403(b) + 457(b) $23,000 + $23,000 = $46,000
401(k) + 403(b) $23,000
You see the significant benefit of having certain retirement plans together.
The funds are typically held in retirement accounts that you enroll in through your jobs or some other investment provider. Putting your money into a 401(k) first is essential because many employers match a portion of employee contributions. Another strategy for retirement saving is the after-tax option where you pay taxes first and then allow them to potentially grow qualified tax-free with tax-free withdrawals such as the Roth IRA.
After-Tax Savings Plan
When you contribute to a Roth IRA or make Roth contributions to a 401(k), you are making after-tax contributions which means you are paying taxes upfront. The investments will potentially grow tax-free with qualified tax-free withdrawals. The catch is that there are limitations to how much you can contribute into these accounts which is significantly less than the tax-deferred options. Tax-free withdrawals are a considerable option if you believe you will be in a higher tax bracket in the future.
For higher earners, interested in moving money into a Roth IRA, there is the option to consider a backdoor transfer of money from a 401(k) into a Roth IRA to bypass some of the income limitations that exist; however, doing this can significantly complicate your tax bill.
Minimizing how much is paid in taxes and maximizing retirement savings
There are several strategies for working to lower your taxes, for example,
You can take advantage of tax credits.
If suitable in some cases, you can convert your retirement accounts to a Roth IRA.
You might invest in long-term tax-advantaged assets such as municipal bonds.
Income Determines Your Tax Liability
There are generally seven tax rates that taxpayers fall into based on income. Your income will determine which of the seven tax brackets applies to you. These brackets tend to change and it is critical to stay up to date on which bracket you fall into.
Additional Medicare Taxes
Under the Affordable Care Act, taxpayers who earn over a specified income have to pay a surcharge called the additional Medicare tax.
Tax Liability of a Health Savings Account (HSAs)
Contributions to an HSA by an employer are typically not included in taxable income. If participants or someone else makes after-tax contributions to their HSA it could be tax deductible.
Alternative minimum tax (AMT)
Depending on your income, you may be subject to the alternative minimum tax (AMT). This tax was created in 1969 stemming from an incident in 1966 when word got out that 155 taxpayers with incomes exceeding $200,000 had paid no federal income taxes that year because they were able to use deductions unavailable to the average worker to lower their taxable income to $0. A deduction is the amount you subtract from your income when you file so you don’t pay tax on it. Members of Congress received more letters from constituents regarding certain taxpayers not having to pay taxes than they did for the Vietnam War.
Over the years, however, more and more people have been impacted and if you happen to be one of them, understanding how it works helps to lessen some of the stress during tax season.
Consider consulting a financial professional
Managing retirement accounts and the tax implications that come into play can be incredibly complex. Consider consulting a financial professional for guidance.
Want to learn more about your retirement planning? Reach out to a financial professional today!
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
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