Kevin Canterbury of Arizona is a financial service specialist, with a focus in retirement asset management. In the following article, Kevin Canterbury discusses taxable assets in retirement, and wisely planning for these often forgotten fees.
Many people look forward to retirement; what could be better than spending your days with no plan, nowhere to be, and all the free time in the world? However, many retirees do not realize the boredom that can set in from not having a job, and they fail to account for taxes as well. Even those who are retired in the United States must pay taxes.
Kevin Canterbury of Arizona says that there is an art to paying taxes while retired, though. There is a way to “tap” one’s retirement funds to minimize the amount of taxable income. Kevin Canterbury of Arizona provides a quick guide to the order in which one should tap accounts.
The first type of retirement fund that people should consider using is taxable assets. This label covers most sources of funding and can be divided into two major groups.
The first group of taxable assets is taxable income. Kevin Canterbury of Arizona says that this includes any money one has made from their work and other things like inheritances. Most funds fall here.
Taxable income covers most sources of money, but taxable assets are other forms of investments. Taxable assets include:
- Real estate
- Raw metals
- Many other forms of material investment
For now, cryptocurrency is in a taxation gray area. It is usually taxed like an asset, but may also be treated as currency if exchanged for goods or services.
Social Security can also be considered an asset. Whether it is taxed or not depends on the state.
Tax-deferred assets are the next to go according to Kevin Canterbury of Arizona. These include 401(k) accounts and traditional IRAs. The biggest difference between them is that 401(k)s are given by employers while IRAs must be opened by the individual.
The general opinion is that 401(k)s are better investments if the employer can match dollar-for-dollar. If not, Kevin Canterbury of Arizona notes that it might be better to open a personal IRA. Mix-and-match is also an option.
Both of these accounts require minimum distributions after the holder turns 73. This means a certain amount must be withdrawn from these retirement accounts yearly. Not only is that money taxed, but whatever someone spends it on will also likely have taxes attached.
Kevin Canterbury of Arizona reports that the last group of funds to withdraw from is a Roth account. Roth accounts (including Roth 401(k)s and Roth IRAs) are tax-free. Any money that the holder withdraws is free to use.
Kevin Canterbury of Arizona notes that a Roth account must sit for at least 5 years, and the owner must reach 59 ½ years old before any money can be withdrawn. Likewise, any Roth conversion must be made at least 5 years before the withdrawal.
The math behind why these accounts are tax-exempt is complex, but they are the least taxed of any asset, meaning that any funds in a Roth account grow tax-free until one must access them.
Kevin Canterbury of Arizona understands that some people are probably looking into how and when they should switch from an IRA to a Roth IRA. The decision ultimately rests on how someone wants to optimize their taxation. If there is a decent chance that someone will be in a higher tax bracket when they retire, they should invest in a Roth account.
The “sweet spot” for converting IRA funds to Roth funds is between when they retire and when they are 73 years old. After that, a certain amount is required in distributions.
Kevin Canterbury of Arizona reports that another common question is whether people should tap into their Social Security or 401(k) first. As a general rule, it is wisest to withdraw from one’s 401(k) for as long as possible.
Tax brackets can be hard to navigate. The choice between IRA and Roth IRA accounts should be made with all considerations in plain view. One can be accessed earlier than the other, after all.
Some sources question whether tapping accounts until they are depleted is viable at all. They might advocate for proportionate withdrawals instead. Those who wish to attempt this should seek a financial advisor or retirement planner before going ahead with this plan. Everyone’s investment portfolio will be different.
Do not forget other tax-deductible assets, though. Charitable donations are one such notable example according to Kevin Canterbury of Arizona.
Withdrawing money from retirement funds can feel like running through an obstacle course. There are so many nuances and instances of fine print that it may be best to hire a professional to plan things. The advice given above, however, is a well-known strategy. The best advice will be that which is designed for your portfolio.