And if you sell assets in your taxable account at a loss, you can use those losses as deductions from your ordinary income.
Once you’re ready to retire and start drawing from your accounts, you need to start thinking about the different assets you have and which is the most tax-efficient to use and when, Amin says.
If you focus on living on money from your taxable brokerage accounts, the money in your 401(k), 403(b) or IRA will still be growing tax-free. Once you hit age 70½, you won’t have any choice — you’ll be required to start drawing down those accounts and paying taxes on the withdrawals.
The amount of this required minimum distribution, or RMD, depends on how much money you had in your account at the end of the previous year, and the IRS’ projection of your likely lifespan.
If you can get by on the income from your taxable brokerage account until you’re 70½ — and delay claiming Social Security until you’re 70 to maximize your monthly check — you’ll stand a much, much better chance of having enough money to last the rest of your life.
Social Security is another beast in itself. If you’re interested in learning more about Social Security and taxes, check out our webinar series.
That brings us to Amin’s final lesson, which is directed at people who are older and well-off and may have the luxury of leaving money to heirs. Rather than focusing on estate tax law, Amin says, “think about whether you may want to pay taxes now to convert a traditional IRA (in which you invested pretax dollars) into a Roth IRA instead.” Roth IRAs have no required minimum distributions, and neither you nor your heirs will pay taxes when money comes out of a Roth.
Now, get back to work on that tax return.
Jean C. Setzfand is vice president of financial security at AARP.
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