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Untax Your Retirement

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Nicole: Hey guys, today we are going to be talking about untaxing your retirement. MJ, what does it mean to untax your retirement? 

MJ: Well, untaxing your retirement means taking the proper steps now, so that when you reach retirement age you are preventing yourself from having a tax time bomb. Ed Slott who is a very well-known tax professional, wrote a book about the tax time bomb, which goes on to explain that taxes are always going to be paid. You cannot invest money or have growth on your investments and not pay taxes. What you can do is control how much taxes you are going to pay during retirement now and take the proper steps to put your money from qualified plans to non-qualified plans or convert that money, if it’s in an IRA, to a Roth IRA. Again, this is causing a taxable event but what people don’t understand is that taxes on the back end of retirement, when you are on a fixed income and you need that money, where else are you going to grab it from but your qualified money? And at that point in time now you are adding income to how much you will earn for the year and you’re paying tax on that which can impact what tax bracket you are actually in at the end of the year.  

Nicole: What kind of strategies do you use to help people untax their retirement? 

MJ: Well, I go through part of this in one of my seminars and we discuss paying taxes on the seed, rather than paying taxes on the harvest. What that means is, paying taxes up front, rather than putting that money away and letting that tree grow, so if you are putting money away into an IRA plan for example, and you are under the threshold of increase, you are allowed to put in $5,500.00 a year, so your putting that $5,500.00 a year, away now, differing the tax burden, but you are letting that account grow. If that account grows to a million dollars now, you’re paying taxes on that million dollars as you are withdrawing it rather than paying tax on it up front. So, I like to tell people, pay taxes on the seed, put that money into a cash account or put that money into your Roth account rather than your IRA. You can start to control where your taxable income is coming from when reach retirement age because a lot of people again they are on a fixed income, maybe they have a pension if they are lucky enough to, they have their qualified plan or they would have their Social Security and a lot of people don’t know that Social Security is not taxed until you hit a certain income threshold. Typically, if you are a high-income earner you are going to be paying taxes on your Social Security.  

Nicole: Good to know. So, what is an In-service distribution and how can it help me?  

MJ: An In-service distribution is something that each qualified plan either has or does not have. It’s a feature inside of employee sponsored plan, whether that be a 401(k), 403(b) and these plans that allow for an In-service distribution means that you are able to withdraw that money while you are still working. If you decide that you don’t like the plan, you have your 401(k) and you have restrictions as to what that money is invested in. You can now take that 401(k) and transfer it from your employee sponsored plan into an IRA plan and at which case you are now in control of that IRA. IRA stands for individual retirement account. You have full control of that asset now and what it’s invested in and at that point in time you can start to decide what you want to do with it. You can convert that money over or once you turn age 59 ½ you can start to withdraw that money, pay the tax on it before you hit retirement and you can start to control your taxes when you get to retirement age. So, the last piece of this puzzle would be either required minimum distributions or RMD’s. At age 70 ½ the government mandates that you start to withdraw money out of your retirement account. If you have a large IRA, you are going to start withdrawing money form that IRA whether you need the income or not. This means that you will be adding income to the end of the year, which could bump you up to the next tax bracket. If you are properly planning for or untaxing your retirement now, during your contribution years then you really have an advantage as to tax planning on the back end, when you start to withdraw from your retirement account.  

Nicole: This is all very helpful.  

MJ: Well, I’m glad you thought so.  

Nicole: If you have any questions on untaxing your retirement, our contact information is at the end of this video and you can post your questions or comments in the comment section below. 

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