The years before retirement are some of the most important for shaping how much of your nest egg you actually get to keep. It's not just about how much you've saved, it's about which accounts that money sits in and when you draw from each one. A little planning now can make a meaningful difference in your tax bill for decades to come.
Here are a few areas worth exploring with your advisor.
Make the most of tax-advantaged contributions
If you're still working, maximizing contributions to retirement accounts remains one of the simplest ways to reduce your current taxable income while building toward the future. Many plans also offer catch-up contributions for those age 50 and older, and even larger catch-up amounts for those in their early 60s. Reviewing your contribution levels each year, and making sure payroll deferrals and IRA deposits are optimized, is a good habit heading into retirement.
Think about where your assets live, not just what they are
Asset location, meaning which account type holds which investment, can be just as important as asset allocation. Income-heavy holdings like taxable bonds may work better in tax-deferred accounts, while tax-efficient investments may be better suited for taxable or Roth accounts, depending on your goals. This is a nuanced area, and it's one where a structured, tailored approach can help you avoid paying more in taxes than necessary.
Consider Roth conversions during lower-income years
The years between when you stop working and when Social Security or required minimum distributions begin can sometimes mean a temporary dip in taxable income. That window may be worth a look for Roth conversions, which can help build a pool of tax-free assets and potentially reduce the size of future required withdrawals. This is a strategy that depends heavily on your individual numbers, so it's worth discussing with a tax professional and a financial advisor together.
Plan ahead for RMDs and Social Security
If retirement is within the next decade, it's worth starting to map out how required minimum distributions and Social Security timing will interact with your other income sources. Larger withdrawals from pre-tax accounts can push you into a higher bracket and may affect how much of your Social Security benefit is taxable. Coordinating withdrawals across account types, ideally a few years in advance, gives you more flexibility and control.
Keep taxable accounts tax-efficient
For the portion of your portfolio held in taxable accounts, favoring investments that generate less current taxable income, and avoiding unnecessary sales that trigger capital gains, can help keep more of your returns working for you over time.
The bigger picture
Tax-smart investing isn't about chasing loopholes; it's about building a structured approach designed to help you manage the tax impact on what you've worked to build, in the context of the retirement you've envisioned. Every situation is different, and decisions like Roth conversions or account location should always be made in the context of your full financial picture.
If you're within a few years of retirement and haven't reviewed your tax strategy recently, now may be a good time for a conversation with a financial advisor.