How to avoid paying taxes on your retirement fund
The amount you’ve painstakingly saved for retirement may still be diminished by the taxes you need to pay. Here’s how to shield your money from the IRS.
You’ve saved for your retirement for most of your working life, and when you’re ready to stop working, the last you thing you want to see is your retirement fund dwindling because of taxes.
The IRS generally has the right to tax all property and rights to property, and this includes retirement savings. According to the agency’s website, the IRS has decided not to impose a levy on a taxpayer’s retirement savings unless it has determined that the taxpayer engaged in “flagrant conduct.”
The IRS has taken steps to protect retirement savings, but recent changes in procedures have eroded these protections. The organization has adopted procedures that allow taxpayers to request or agree to “voluntary” levies on retirement accounts.
Taxpayers whose retirement fund would have been shielded from taxes in the past may agree to these “voluntary” levies out of fear or anxiety, and may then find themselves in economic hardship during retirement.
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How to avoid paying taxes on your retirement fund
There are some legal ways to protect your retirement savings from the IRS, and with some planning, you could enjoy more of your hard-earned dollars when you retire.
Make sure you have the appropriate account for your savings
It’s best to put your money in a retirement account because this provides some tax advantages. One factor to consider is how you think your earnings will change over the course of your career. If you think you’l belong to a lower tax bracket by the time you retire, it would be best to pick a tax-deferred account.
Another thing to think about is whether you think you would need to get your retirement fund before you actually stop working. If you withdraw your funds too early, you will be penalized. Familiarize yourself with the contribution rules of whichever account you choose for your money.
Take a loan instead of withdrawing your money
In the event that you do need funds and are considering early withdrawal from your retirement account, think about borrowing money instead from your 401(k), if it is allowed. You won’t need to pay levies on the amount you withdraw, for as long as you pay everything you owe on time.
However, this will still have an effect on your fund, as the amount you saved would shrink due to your loan, and you would have to save more in the future to get back to where you were savings-wise.
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Do a Roth IRA conversion
If you have a traditional IRA or 401(k), you are required to withdraw your money in what is known as required minimum distributions or RMDs, once you turn 72. However, this is not a requirement for Roth IRAs.
You could choose to do a Roth IRA conversion, which means you pay taxes on the money you are converting into the fund in the year that you do this. When you have changed the account, you can simply leave the money untouched in the nest egg to grow for as long as you like.