Posted by The TaxAdvocate Group, LLC

Tested Ways to Reduce Your 401(k) Taxes

Tested Ways to Reduce Your 401(k) Taxes

People with a traditional 401(K) need to pay taxes on their distribution – the ordinary income tax. What you pay is a factor of your tax bracket and age as people below 59½ will be slammed with a 10% early withdrawal fee. This could send your tax rate to the top 37%.

After consulting several financial professionals, we learned how to reduce the tax on 401(k)s for their clients. Here is what they told us:


  1. Apply the 'Still Working' Exception

Many people assume that they are bound by the required minimum distributions (RMDs) once they get to age 72. At the end of 2019, however, RMD came down to 70½ via the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The only condition these RMDs will not apply is if you were currently working and was with your employer on getting to that age.

The implication of this is that you can leave the funds in your accounts, and the earnings will accrue while you will not face any tax yet.

However, one thing to note is that Uncle Sam has not specified what "still working" amounts to. It might mean that you will be an employee throughout the calendar year.


  1. Try Tax-Loss Harvesting

Tax-loss harvesting is another strategy in which you will have to sell underperforming securities using your regular investment account. What you will lose in the securities will checkmate the taxes on your 401(K). 

Some tax burdens coming from the 401(k) distribution can be reduced by tax-loss harvesting as long as you do it right.

 

  1. Keep Tabs on Your Tax Bracket

Bear in mind that the entirety of your 401(k) distribution is a factor of your tax bracket at the distribution time. With this, you are better off taking a distribution for the upper limit of your tax bracket.

You can avoid paying huge taxes if you can be diligent enough to do detailed tax planning every year to reduce your taxable income even after distribution significantly. For married people, filing jointly is a way to achieve this.

Careful planning can help you limit your 401(k) withdrawals to prevent it from getting you to a higher tax bracket. The remaining ones will then come from after-tax investments like cash savings. This also applies to huge expenses you incur when you retire like a house purchase, ample vacation, etc. an excellent way to limit the funds you take from your 401(k) is to bring both Roth and 401(k).


  1. Do Not take Social Security Yet. 

You can stay at a lower tax bracket and keep your taxable income lower by putting off your Social Security benefits till a later date. It is a tax saving strategy in which you will have to switch some of your funds to a Roth IRA. Besides, waiting till after 70 years to get your Social Security benefits is a good idea.

As long as delaying your social security benefit will not hurt you, it can boost your payment. For people born within 1943-1954, for instance, the full retirement age is 66. This age qualifies you for 100% of your benefits. Delaying your benefits to age 67, on the other hand, gives you 108%, and it shoots up to 132% at age 70.

There will not be any more yields after age 70. But whatever it may be, you need your Medicare at age 65.


  1. Consider Net Unrealized Appreciation (NUA)

For people with company stock in their 401(k), it could qualify them for net unrealized appreciation (NUA). This is only possible if the company stock portion of the 401(k) gets distributed to a brokerage account. 

Doing this does not exempt you from paying income tax on the original price of the stock. The capital gains will, however, be lower on the appreciation of the stock.

With this, your money is better in a taxable account, and not a traditional account or a 401(k). This is a complex strategy that is best done with the help of a professional.

 

While these are tested strategies that work, be sure not to try them without help. 

FOR MORE INFORMATION ON YOUR OWN 401K STRATEGIES OR HOW TO MAXIMIZE YOUR TAX BENEFITS, PLEASE CONTACT The TaxAdvocate Group, LLC FOR THIS OR ANY OTHER ASSISTANCE YOU MIGHT NEED OR TO MAKE AN APPOINTMENT, PLEASE CLICK ON THE BLUE BUTTON BELOW.

THANKS FOR VISITING



The TaxAdvocate Group, LLC
Contact This Member