Consider tax-deferred and non-deductible retirement accounts
Perhaps the trickiest aspect of retirement planning is trying to predict what the tax rates are going to be when you retire. The earlier you start planning, the more difficult this guessing game gets.
If you've accumulated a significant amount of wealth during your working years, ordinary income and estate taxes will be an important consideration for you.
Tax-deferred accounts [traditional IRAs, 401(k)s, 403(b)s and certain annuities] offer you tax benefits now that will lead to taxable withdrawals during retirement. Roth retirement accounts [IRA, 401(k), 403(b)] require that you contribute taxable income now that will spare you from paying taxes when you retire.
Take advantage of tax diversification
Ideally, you'll want your money diversified between tax-deferred and non-deductible accounts during your working years. This gives you the flexibility to benefit from either scenario. As you get closer to retirement, you and your BB&T Wealth advisor will need to act based on the most likely circumstances ahead. This may involve moving money from your tax-deferred accounts to a Roth account [IRA, 401(k) or 403(b)]. You would take an initial tax hit for doing so, but it could possibly save tax dollars and diversification over the long term for you and/or your beneficiaries by having multiple tax buckets to draw upon in your retirement years.
When it comes to timing, also consider the required minimum distributions (RMDs) you’ll need to take from your tax-deferred accounts. By the time you reach age 70½, you must start withdrawing the legally required minimum amount. Neglecting to do this will incur severe tax penalties.
Consider tax impact on your retirement income
While there's a penalty for withdrawing less than the required minimum from some of your accounts, there’s also an indirect penalty for withdrawing too much. If you take out a large amount of tax-deferred money during a given year, you may inadvertently push yourself into a higher income bracket for that period.
Strategize ways to reduce capital gains and estate taxes
Here are several tactics for handling the tax challenge:
- Charitable remainder trusts – These allow you to apply additional charitable deductions to your annual income tax, while providing you with supplemental income throughout the remainder of your life. They can also help you defer or potentially eliminate capital gains taxes on the donated assets and allow you to reduce your overall estate tax.
- GRATs – Grantor Retained Annuity Trusts (GRATs) allow you to transfer assets out of your estate for a limited term, thus deferring or eliminating estate taxes on those particular assets.
- Dynasty trusts – This is a trust that doesn't just benefit your children or grandchildren, but multiple generations of descendants. Best of all, this type of wealth transfer will allow you and your beneficiaries to reduce estate taxes. If you're future-minded regarding your legacy, a dynasty trust may be a good option for you.
- Harvesting capital losses – This practice is a good strategy for offsetting capital gains. Identify a stock in your portfolio with losses equivalent to your capital gains, and then sell the losses to counterbalance your overall gains. After 30 days, you have the option of buying back any stocks you sold. You can also offset up to $3,000 annually of ordinary income.
The bottom line
To minimize taxes in retirement, it helps to diversify your tax situation by having both tax-deferred and Roth accounts. As you near retirement, you and your BB&T Wealth advisor can create a withdrawal strategy that’s right for you.
How Can I Best Determine the Value of My Company?
Understanding your company’s value is both an art and a science, and a team of experts can guide you along the way.
How Should I Plan for Retirement Income?
Proper financial planning can help you meet your retirement goals.
How Should I Structure and Execute My Will?
A last will and testament may be your most important financial document, and you'll want to consider the optimal ways to structure and execute it.
Traditional banking services are provided by Branch Banking and Trust Company, Member FDIC.
Only deposit products are FDIC insured.
Trust and investment management services are provided by Branch Banking and Trust Company. Other investment solutions are offered by BB&T Investments and BB&T Scott & Stringfellow, divisions of BB&T Securities, LLC, member FINRA/SIPC. BB&T Securities, LLC, is a wholly owned, nonbank subsidiary of BB&T Corporation. Securities and insurance products or annuities sold, offered or recommended by BB&T Securities, LLC or Branch Banking and Trust Company are not a deposit, not FDIC insured, not guaranteed by a bank, not insured by any federal government agency and may go down in value.
Services and products featured herein may include some offered by affiliated companies of BB&T Wealth. The fees for those services and products are in addition to the fees charged by BB&T Wealth. As a result, BB&T Corporation, as a whole, receives more compensation than would otherwise be received if a non-affiliated service or product was used. When we offer any service or product to a client, we use the same process to offer both affiliated and non-affiliated services and products. When we have authority to select any service or product on behalf of a client, if our process shows affiliated services and products to be competitive with corresponding non-affiliated services and products, then we may select affiliated products and services. BB&T Wealth expresses no opinion on the use of BB&T affiliated services and products when the client selects such services and products in a client-directed account.
The information provided should not be considered as tax or legal advice. Please consult with your tax advisor and/or attorney regarding your individual circumstances.