Fidelity Survey: 4 Tax Moves Americans Use To Stretch Retirement Savings
Taxes can be one of the highest costs in retirement — but with the proper planning, you can mitigate their impact.
A recent Fidelity survey shows which tax-planning moves Americans say they're implementing now, from maximizing workplace accounts to timing Roth conversions. Here are the top tax-aware moves Americans are making.
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1. Contributing to Tax-Advantaged Retirement Accounts, Like 401(k) Plans and IRAs
Over one-third of Americans (38%) contribute to tax-advantaged accounts.
"Contributing to tax-advantaged retirement accounts can be one of the most efficient ways to improve tax outcomes over time," said Rita Assaf, vice president of retirement products at Fidelity. "Pre-tax contributions to workplace retirement plans like 401(k) [plans] can lower your taxable income today and allow savings to grow tax-deferred until retirement, when withdrawals are taxed."
2. Taking Advantage of Their Employer 401(k) Match
Many employers offer a matching contribution to 401(k) plans, and 34% of Americans say they are taking advantage of this match.
"Capturing an employer match is one of the most important financial moves people can make, because it combines immediate, tax-deferred savings with what is effectively 'free money,'" Assaf said. "Your own pre-tax contributions reduce current taxable income, employer match dollars grow tax-deferred and you defer taxation on both until withdrawal."
Put simply, contributing up to your employer match effectively doubles the amount of savings that can potentially grow and compound over time.
3. Completing Roth Conversions When They're in a Lower Tax Bracket
Fifteen percent of Americans have completed Roth conversions — taking pre-tax contributions and converting them to after-tax Roth dollars by moving assets from a pre-tax account like a traditional IRA to a Roth. When you do this, you are paying taxes now, so future qualified withdrawals are tax-free.
"Note that Roth conversions do increase your taxable income in the year you convert, which is why many people consider conversions in lower-income years or during a phased exit from work, when their marginal tax rate may be temporarily lower," Assaf said.
"It's also important to keep in mind that Roth IRAs currently have no required minimum distributions for the original owner," she continued. "Roth conversions made before retirement can reduce the burden of future RMDs from pre-tax accounts, reduce exposure to higher tax brackets later and build account diversification so retirees can choose to build the most tax-efficient retirement income plan for their unique situation."
4. Consolidating Old Accounts To Simplify Withdrawals and Avoid RMD Mistakes
Finally, 12% of Americans cite consolidation as part of their tax approach.
"Consolidating scattered accounts can be a key piece of a retirement income plan, largely because fewer accounts help simplify drawdown strategies and make it easier to coordinate withdrawal sequencing across taxable, pre-tax and Roth accounts," Assaf said.
Consolidation also helps avoid missed RMDs, simplify withholding and reduce duplicate fees so more dollars stay invested.
"For some, rolling old plans into an IRA can also enable tools like qualified charitable distributions in retirement," Assaf said, "which can be a tax-efficient way to meet philanthropic goals."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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