3 Ways Millionaires Plan To Reduce Taxes in Retirement — You Can Use These Too
Written by
Gabrielle Olya
Edited by
Ashleigh Ray
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The No. 1 burning question that millionaires have about retirement is, “How will taxes impact me?” according to a new Northwestern Mutual study.
But while high-net-worth individuals are concerned about how taxes could impact their retirement savings and strategies, many have plans to deal with them — 61% have a plan to reduce the taxes they will owe on their retirement savings, the study found.
Many of these strategies are suitable for retirement savers of all income levels. Here are the top ways millionaires plan to reduce their taxes in retirement that can benefit middle-class Americans as well.
Strategic Withdrawals From Traditional and Roth Accounts
The top way millionaires plan to reduce their taxes in retirement is to make withdrawals strategically from traditional and Roth accounts to keep themselves in a lower tax bracket, with 44% stating that they plan to use this strategy.
“The Roth strategy is especially appealing for middle-class families because they will likely stay within the income parameters to be able to fund Roths all the way to retirement,” said David Smallwood, partner and wealth management advisor for Northwestern Mutual’s True Wealth Partners based in Nashville, Tennessee.
“[This] will allow for them to create a larger pool of dollars that will distribute tax-free in retirement.”
Using Products Like Permanent Life Insurance or Annuities
Twenty-four percent of high-net-worth individuals said that they are using products like permanent life insurance or annuities for their tax benefits.
“Middle-class families can use [permanent life insurance] to create safe dollars and form a non-market-correlating asset for them to pull from during down years in the market throughout retirement, which can be an extra safeguard for their nest egg,” Smallwood said.
“An annuity can act as a ‘personally funded pension’ to create another stream of income to complement Social Security and create a higher likelihood of ongoing base expenses in retirement being covered by guaranteed income.”
Making Roth Conversions Before Taking Required Minimum Distributions or Social Security
Nearly a quarter of the millionaires surveyed (23%) said they will make Roth conversions prior to taking RMDs or Social Security in order to reduce their retirement taxes.
“This can be appealing to middle-class families because they are likely to be in a lower tax bracket than affluent families, which will make Roth conversions less painful,” Smallwood said. “These conversions could also allow middle-class families to be in an even lower tax bracket during retirement since Roth distributions won’t count against them as taxable income.”
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