Understanding Taxes on Retirement Investments

As you enter into retirement, it’s important to consider the tax implications of your investments and how you can maximize your savings in a tax-efficient way. Here are some things to consider when potentially moving your money from investments to income or into new retirement accounts:

Understand the different types of retirement accounts: There are several types of retirement accounts, including 401(k)s, traditional IRAs, Roth IRAs, and SEP-IRAs. Each type of account has different rules, contribution limits, and tax implications, so it’s important to understand the differences and compare the options that are available to you. When you start to pull money out of these accounts, the taxes you owe are different as well. Proactive withdrawal planning may be a significant benefit. If you are taking money from a traditional IRA or 401(k), this counts as income. While most understand taxes are owed on these withdrawals, few understand that as it counts as income, this could potentially raise your tax rates on other income you are receiving, such as Social Security, Pensions, or other income sources.

Evaluate your investment strategy: When you invest in retirement accounts, you’ll typically have a range of investment options, insurance options, and products. It’s important to evaluate these options and make sure they align with your investment strategy and risk tolerance. If you have saved in a brokerage account, you may already have an investment advisor or a strong understanding of how you prefer to invest. When you transition into living off your assets instead of solely focusing on growing them, more needs to be considered. Your risk tolerance should be re-evaluated often during retirement, you have less time to recover in the case of a loss, but you will also likely be making withdrawals, so a significant loss can not only affect your income but also may not be able to be recovered from. Protecting your income streams should likely become more important the further you get into retirement, planning for this is often the only way to secure your way of life.

Evaluate your current portfolio: Before moving your money or withdrawing, evaluate your current investment portfolio and determine which assets you want to keep and which ones you want to sell. This is a great time to have your risk tolerance assessed. When sticking to the same strategy for long periods, one can slowly drift away from what their original risk plan was. If you can work with a firm that provides a “stress test” they can give you a better grasp on what your current risk score is. Firms such as Oxford Advisor Group often will run these tests complimentary. If you can do a deep dive into your current portfolio, you may be able to find underperforming positions or discover more risk than you had planned to take. It is important to understand what positions you are in, and if you have an investment advisor, have them go through each of them with you instead of

Withdrawal rules: Retirement accounts can have rules around when you can withdraw your funds and how much you can withdraw without penalties. It’s important to understand these rules and factor them into your retirement planning. Taxes come into play when you start to pull money out of certain retirement accounts. The most common accounts used for retirement are a 401(k) and IRA.  Both of these types of accounts are tax-deferred, meaning there are still taxes that are owed on these assets.  Those taxes come due when you pull money out of these accounts. Money pulled out of a tax-deferred account will count as income, meaning you add this amount to any other income you have earned and that will determine your tax rate. Pulling money out of a 401(k) could potentially raise your tax rates on other income, such as Social Security or Pensions.

As you move into retirement you may benefit from working with a financial advisor that focuses on taxes in retirement. Retirement planning is different than simple investment planning. It can be complex, so you may want to consider working with a financial advisor who can help you navigate the process and make informed decisions not only about your investments, but also about tax implications, Social Security benefits, Estate Plans, and income-protecting options such as some types of insurance. Finding an advisor who works in a fiduciary manner and has experience specifically in these topics may help you better prepare and enjoy retirement.

Oxford Wealth Group, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information about Oxford can be found by visiting the SEC site www.adviserinfo.sec.gov. and searching by our firm name. We are a financial services firm that utilizes insurance and investment products. Insurance products and services are offered and sold through Oxford Advisory Group. Oxford Wealth Group, LLC and Oxford Advisory Group are affiliated but separate entities.

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