Minimizing taxes is one of the ways rich folks handle their money better than the rest of us. The more cash you keep in your coffers, the greater the odds of building a sizable nest egg.
Among those who have more than $1 million in investable assets, 61% have a plan to minimize the income taxes they pay on retirement savings, according to a recent Northwestern Mutual survey of more than 4,500 adults in the U.S.
However, just 30% of Americans surveyed who are not millionaires have a similar plan.
So, what can you learn from wealthy folks? Here are some key ways millionaires intend to avoid the tax ax.
1. Withdraw from retirement accounts strategically to keep their tax rate low
Millionaire survey participants who plan to do this to reduce taxes on their retirement savings: 44%
If you contribute to a traditional IRA or 401(k) plan, you can avoid years or even decades of taxation on that money while you are in the workforce. But at some point during retirement, the tax bill comes due.
Carefully managing and withdrawing this money during retirement can keep you in a lower tax bracket, which ultimately puts more cash in your pocket.
This is a complex topic, and many people would benefit from a little help with the process. If you need some assistance crafting the right strategy, check out “How Do I Choose a Financial Advisor? “
2. Use both traditional and Roth retirement accounts
Millionaire survey participants who plan to do this to reduce taxes on their retirement savings: 37%
Contributing to a mix of traditional and Roth retirement accounts can give you additional flexibility during your golden years. Withdrawals from Roth accounts incur no taxes, which helps keep you in a lower tax bracket.
That means a mixture of withdrawals from traditional and Roth accounts during retirement can often substantially lower your tax burden. Again, many people can benefit from discussing the right strategy with a financial advisor or tax professional.
Money Talks News founder Stacy Johnson discusses the virtues of Roth accounts in the podcast “The Ultimate Guide to Roth Retirement Accounts: Why You Need One Now.”
3. Donate to charity strategically
Millionaire survey participants who plan to do this to reduce taxes on their retirement savings: 27%
Doing a little good for others can be great for your own tax situation. By donating to charity in the right way, you can lower your tax burden during retirement.
Just to cite one example, making a qualified charitable distribution (QCD) of up to $100,000 each year from your IRA can help you avoid some taxes on the required minimum distributions you must take in retirement.
For more on this strategy, check out “6 Strategies to Manage Required Minimum Distributions.”
Other ways millionaires will lower their taxes in retirement
Here are some additional ways wealthy folks plan to lower their taxes during retirement:
- Use a health savings account (HSA) or other tax-advantaged health care account: 24%
- Use financial products like permanent life insurance or annuities for their tax benefits: 24%
- Make Roth conversions before taking Social Security or required minimum distributions (RMDs): 23%
- Use qualified charitable distributions (QCDs) from an individual retirement account (IRA): 22%
- Use the basis paid into the cash value of permanent life insurance to keep themselves in a lower tax bracket: 19%
- Contribute to other tax-advantaged accounts, such as a 529 plan: 17%
- Take advantage of a qualified longevity annuity contract (QLAC) to set aside funds for later in retirement: 17%
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