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Planning to Retire Early? Tax Tips to Keep In Mind

Planning to Retire Early? Tax Tips to Keep In Mind

Ah, early retirement, who doesn’t want it? Of course everybody does. However, there are only a handful of people who are definitely motivated or have a good idea how to retire.  Retirement does sound easy, relaxing and leisurely, but it still doesn’t exempt you from paying your taxes. It is important to understand that early retirement can be quite complex if you don’t have a proper know-how, which is why preparing for it earlier can really give you a peace of mind.

When you talk about retiring early, the foremost thing you need to consider, quite seriously, is saving money – and that is primarily because you will be needing your retirement funds sooner than anyone else. And this also means those funds that you will withdraw will absolutely need to last longer. Secondly, it is quite pertinent that you focus your investment in different retirement income accounts other than the 401(k) and/or an IRA. Why? Well, that is because these accounts will penalize you heavily for withdrawing funds before you turn 59 and a half.

Remember, once you start saving money for an early retreat, you will also be aiming to save for a basic retirement as well. In simpler words, you’ll still want to invest your money in to your employers retirement plan, which could be the Roth IRA or it could be a traditional IRA among a few others. On the other hand it is also important that you also invest in tax-advantaged plans that don’t place heavy penalties on early withdrawals.

In light of this, here are few tips that can help you land a successful early retirement plan:

Concentrating on Effective Tax Investments

To successfully retire early and have a decent payout every month, it is imperative that you invest in accounts which are tax-friendly and have investments that don’t penalize you for early withdrawals. Mentioned below are effective ways you can prepare to retire early with style:

Pensions

Pension plans that are more defined are quite rare, however, there are still employers that will offer you a pension plan that begins to pay immediately when you decide to retire – or allow you to withdraw funds without being penalized when you turn 59.5. These pensions plans are mostly state sponsored or are granted by federal agencies. For example, military pension plans. As a good bonus some employers will also grant retirees with a continuation of insurances expenditure.

Bonds that are Tax Exempt

 Tax exempt bonds are the perfect way to enjoy a tax efficient method of creating a passive income. A majority of tax exempt bonds are granted by state and municipal agencies. They will offer you yield and at the same time will also offer a total tax exemption from your federal tax income. As the cherry on top, if you consider investing in tax exempt or municipal bonds offered by the state where you reside in, you could evade having to pay both federal and state taxes – as a result you will also be able to gain some of your income from your bond holdings.

 U.S. Treasury Bonds

Early retirees can greatly benefit from U.S. Treasury bonds. You should know that the bonds offered by the U.S. Treasury are the safest investment you can make. On top of that, investing in these bonds will also enable you gain considerable tax benefits on a state level too. The yields from treasury bonds are relatively low, which is a given, but if you want tax efficiency, a secure income, and money from your investment portfolio, investing in U.S. Treasury bonds is indeed a wise choice.

 Stocks

Long term equity holdings are both tax efficient and equally important when it comes to aiming your investment portfolio for future growth. Taxation on capital gains that are long termed as well as on dividends is capped at 15%. Plus, you would only be required to pay this tax when you sell your shares or when you receive your dividends.

Real Estate

There is nothing but tax benefits when you talk about investing in real estate. It is important to understand that U.S. tax laws benefit homeowners and real estate investors, favoring them in more than one way. For example, as a homeowner the U.S. tax code will allow you to write off a considerable amount that you enjoy as rental income. Plus, you don’t have to pay any capital gains tax, i.e. is if you intend on selling your primary property.

The Bottom Line

These are some really good tips that help you maintain your monthly cash-flow when you decide to retire early. The key is just to research more and be aware of what you can and cannot do.

RKL Tax Service LLC
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