While you’re heading towards your retirement, there is a high chance that you’re also stepping into a special time to do some really worthy tax planning. What is this sweet spot? It is the stretch of time in between when you retire from your full-time job and when you begin to take the minimum distributions from the 401(k) plan or the traditional IRA account by the age of 70 and a half.
Given the fact that full-time work is behind you and the mandated distributions are lying in front of you, this is also the time when you seem to be included within the lower tax bracket. This is why it is the best time to take a look at whether or not the strategies can work well along with the taxes. You will definitely get ways in which you can seek benefits of low rates on taxes but it is vital for you to ensure that any move that you make is in line with your personal retirement goals. How are you supposed to monetize on your lower tax bracket? Here are few ways.
Adopt the ROTH way
Have you considered converting your conventional IRA or your traditional 401(k) plan into a Roth IRA? Though you will still be liable to pay taxes on the amount that you convert, the rate will definitely be lower. If you leave these assets in a conventional 401(k) or IRA plan and do nothing with them until you start taking the minimum distributions, such withdrawals could possibly push you into an increased tax bracket. This is because the tax rate that would be applicable to your assets would definitely be higher. If you withdraw an amount from your Roth IRA, this is tax-free and there aren’t any minimum distributions that come with them. In case you convert, you will be locked in.
Sell off a Few Winning Financial Assets
In case you have any asset like stocks that are in your taxable account, it is an advisable option to look at whether or not it would make sense to sell them off so that you could be included in a lower tax bracket. This is one of the best opportunities through which you can monetize the gains on which you’ve been sitting. The rate of tax on long-term capital gains is entirely based on the adjusted gross income. For instance, in case a married couple has an income that’s under $77,200, they won’t have to pay any taxes on the gains. You also need to be aware that the people who fall under the category of high earners like married couples with adjusted gross income which is more than $250,000 are usually subject to an added 3.8% of investment income.
Employee Stock Options Should be Determined
For all the people who are heading towards their golden years with certain employee stock options, you can exercise such options at their lower tax bracket. What if the value of the stock is high and the exercise price is low, you will get many in-built gains. You could also use a lower tax bracket to exercise a few of the other options which you have at hand.
Therefore, if you wish to maximize those retirement sweet spot years, you should take into account the above-mentioned options and lead your golden years in peace.