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What You Need To Know About Tax Advantaged Retirement Plans


The tax code is very complicated, but it also creates a number of strategies for you to keep more of your hard-earned money, especially if you’re putting it into retirement accounts.  Uncle Sam is patient, but after a number of years of working and building your wealth, Uncle Sam wants his share of your retirement savings.

To help my readers with this topic, I asked CPA, Tom Woulfe from Evans and Woulfe Accounting for his expertise.  I’m grateful to Tom for being a guest author on this blog post. Below are some helpful insights from Tom regarding tax advantaged retirement plans that you need to know.

If you have retirement savings in IRAs, 401(k)s and/or business-sponsored retirement plans, one essential element of retirement planning is knowing when to take required minimum distributions (RMDs) from retirement accounts.  RMD rules govern how much you must withdraw from certain retirement accounts and when you must start taking withdrawals.

Failure to take a RMD in any given year can result in steep tax penalties.  By not taking a RMD by the deadline, individuals can be stuck with one of the heftiest U.S. tax penalties around: 50 percent.  Most tax-advantaged retirement plans have RMD rules, but the rules vary from one account to another.

As you’re planning for retirement withdrawals, it’s essential that you take these rules into account:

  • Roth IRAs do not require RMDs, so you may want to consider converting your traditional IRA to a Roth before you reach 70 ½ to reduce RMDs in the future. You can choose to convert your IRA assets to a Roth IRA at any time, even in retirement.
  • Some types of retirement plans don’t have RMDs until you retire.  If you have a 401(k)s or 403(b)s you can put off taking RMDs if you’re still working.
  • For all non-Roth IRAs, including SEP and SIMPLE plans, you must start taking RMDs by April 1st of the year following the year in which you turn 70 ½. It doesn’t matter whether you’re retired.
    • Be careful because you may get hit with two withdrawals in the same year. Once you start taking RMDs you must keep taking them every year by December 31.
  • Be sure to calculate the cost in taxes. Taking two RMDs in one year could throw you into a higher tax bracket, increasing your total taxes owed. For some individuals, it’s smarter to take RMDs one year at a time, even if it means taking that first withdrawal a few months before you technically must.
  • There are different rules and options for inherited IRAs depending on if the recipient is the spouse, another person or an entity.

Related: How to Pay Fewer Taxes in Retirement

The rules are complicated and there is no “one size fits all”, so always consider consulting with a tax professional before making any decisions.

Taking advantage of the ability to defer taxes can offer benefits rather than paying taxes up-front.  This is especially true if you’re holding investments in tax-deferred accounts which over time can come with increased costs.

Another potential strategy would be to have a 3-step account plan. The 3-step account plan is for you to have a taxable account, the tax-deferred account and the tax-free account with the correct balances in each one. If you’re not having these types of conversations with your financial advisor, I would recommend speaking to a financial professional held to a fiduciary standard who also works with a tax specialist so you can sit down with both of them and a tax efficient drawdown strategy that works for your retirement plan.

Until next time…

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