Retire Early

Older couple sitting on a dock at a lake. Across the lake is a cabin. Behind the cabin is a green forest topped by a stunning, ice-capped mountain.

Wouldn’t it be nice to check out of the workforce and retire early? Without worrying if you have enough money to retire early? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.

  • Maximize tax-advantaged retirement accounts. Retirement accounts like traditional IRAs and 401(k)s allow you to save pre-tax money, invest the funds, and not pay taxes until the funds are withdrawn during retirement years. In other words, the IRS allows you to invest their potential tax receipts along with your money and will take its share of your investment earnings at a later date.
  • Leverage the catch-up provisions within retirement accounts. Most retirement accounts allow older taxpayers to invest even more money in these retirement savings accounts. Even better, the catch-up contribution amounts are now indexed to inflation so the amount will rise more quickly over time. The key retirement fund limits for 2024 are:
    • 401(k), 403(b), 457: $23,000 ($30,500 if 50 or over)
    • Traditional/Roth IRAs: $7,000 ($8,000 if 50 or over)
    • SIMPLE IRA: $16,000 ($19,500 if 50 or over)
  • Consider Tax-Free Retirement Choices. Roth IRAs and Roth 401(k)s are an interesting alternative to other qualified retirement plans. Within Roth accounts you invest money in your plan with after-tax dollars, but any earnings are tax-free as long as you follow the withdrawal rules. While this lowers your potential initial investment, you create a source of funds that can earn money without being taxed in the future. Even better, both Roth IRAs and Roth 401(k)s no longer have required minimum distribution rules.
  • Roth Rollovers. You may also roll money from most qualified retirement accounts into Roth retirement accounts. When you do this, you must pay the tax on the funds rolled over, but the rollover makes any future earnings within this account tax-free as long as you follow the distribution rules. These funds will then be free from taxes when you retire.
  • Consider Health Savings Accounts and their catch-up provisions. Health Savings Accounts allow you to set aside money to pay for qualified health expenses in pre-tax dollars. To be eligible to set up this type of savings account, you must be enrolled in a qualified high deductible medical insurance plan. The good news is that unused funds can be invested and carried forward to future years. Use this money to augment your retirement plan.
  • Consider state taxes. Part of your retirement plan is understanding where you wish to live. It is important to note that states are not created equal on this front. Many states have no state income taxes, while others like Hawaii and California are in excess of 10%. Some states tax Social Security payments, while others do not. Many states are also trying to take the position that you must pay them state taxes on all retirement plan withdrawals from money earned while you lived in their state, even though you moved years ago! So pay attention to how your chosen state views your retirement income as a source of tax revenue for them.
  • Consider additional deductions and benefits. There are also a number of other benefits to be considered as you reach retirement age. These include:
    • Additional standard deduction when you reach age 65
    • Credit for being elderly/disabled
    • Timing of when to begin Social Security benefits
    • How your Social Security benefits will be taxed
    • Medicare and Medicaid plans
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Gwen Harrison President

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