Planning for retirement can be challenging for busy nurses. But planning is essential to help ensure a comfortable and stress-free retirement. One critical part of retirement planning is tax-efficient strategies. After all, no one wants to overpay taxes. Tax planning strategies are more than about compliance. It’s about optimizing your financial situation to help legally minimize your tax bill. In this blog post, we’ll explore tax-efficient strategies for retirement that nurses can use to help optimize their income and savings.
Consider Employer-Sponsored Retirement Accounts
Many employers offer a retirement account as an employee benefit. Examples are 401(k) or 403(b) accounts. These tax-advantage accounts help employees save for retirement with pre-tax dollars. And any earnings in your account grow tax-deferred. So, you don’t pay taxes until you withdraw the money, typically when you are 59 ½ or older. You may pay an early withdrawal penalty tax if you withdraw money before 59 ½, with some exceptions. Also, some employers match contributions, up to an amount allowed by the Internal Revenue Service. This is like free money to employees. Employer-sponsored contribution plans follow the rules of the Internal Revenue Service (IRS). One IRS rule is contribution limits for employer-sponsored retirement accounts. For 2023, the contribution limit for employees under 50 is $22,500. If you are 50 or over, you can contribute another $7,500 in a catch up contribution. While not as popular as contribution retirement accounts, some employers also offer pensions. With a pension, your employer sets aside money for your retirement. Because each employer-sponsored retirement plan is different, consider speaking with your Human Resources Department for more details.
Consider a Roth Individual Retirement Account (IRA)
A Roth IRA is a retirement account that allows you to contribute after-tax dollars. Your money can grow tax-free in a Roth IRA. You can withdraw your contributions anytime. But you must hold the account for at least 5 years to withdraw the earnings at 59 ½ or older. If you withdraw earlier, expect to pay a 10% early withdrawal penalty tax. But when you withdraw the money at 59 ½ after holding the account for at least 5 years, you won’t pay tax. This may be a good choice for nurses who expect to be in a higher tax bracket in retirement. The challenge with the Roth IRA is the contribution limit. For 2023, the contribution limit is $6500 until 50. If you are 50 or over, you can contribute another $1000 in a catch up contribution. And while you can have unlimited Roth IRA accounts, your total contributions cannot exceed the IRS limits.
Consider Tax Diversification
Tax diversification means having a mix of taxable and tax-free retirement accounts. This can help you manage your tax liability in retirement. For example, if you have a mix of traditional and Roth retirement accounts, you can withdraw money from your traditional accounts up to the standard deduction. Then you can consider withdrawing tax-free money from your Roth accounts.
Plan for Required Minimum Distributions (RMDs)
RMDs are the minimum amount you must withdraw from your traditional retirement accounts each year starting at age 73. If you don’t take the required amount, you’ll face a penalty. A tax strategy to consider to help reduce RMD’s is to convert some traditional retirement accounts to Roth accounts. But you’ll pay upfront taxes with this strategy. Consider speaking with a tax professional or Financial Advisor to understand the effects of this tax strategy.
Consider Tax-Efficient Investing Strategies
If you have investments in retirement, it’s important to know how gains are taxed. Investments held for one year or less are short-term capital gains. Short-term capital gains are taxed as ordinary income. Investments held for 366 days, or more, are long-term capital gains. Long-term capital gains are taxed in a lower tax bracket. Another investing strategy is to consider tax-efficient assets like index funds or tax-free municipal bonds. Finally, consider placing tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts. These tax strategies aim to help increase your after-tax income. These are several considerations to help optimize your tax planning strategies. Consider speaking with a tax professional or Financial Advisor to help you decide which investment tax-efficient strategies align with your overall plan.
Tax Loss Harvesting
Tax loss harvesting involves strategically selling investments that have incurred losses to offset long-term capital gains. Tax loss harvesting aims to help in retirement in several ways. First, you can keep more of your retirement income by minimizing capital gains taxes. Second, tax loss harvesting allows you to rebalance your investment portfolio. By making necessary adjustments, you can realign your portfolio with your retirement goals and risk tolerance. Finally, tax savings from harvesting losses can help give you extra income or reduce your overall tax bill.
Consider Living in a Tax-Friendly State
If you are planning to relocate, consider moving to a tax-friendly state. Living in a tax-friendly state may help you minimize taxes in retirement. Some states have low to no income tax. And some states may offer tax exemptions for retirement income. States with no income tax as of 10/1/2023 are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Consider Permanent Life Insurance
The cash value of permanent or whole life insurance grows tax-free. And because you can borrow against your cash value, you will have a tax-free loan to help with retirement income. One major trade-off to this tax strategy is your loan will reduce your death benefit. Consider speaking with a Financial Advisor to help decide if this strategy is best for you.
Estate planning is arranging for your assets to be distributed after you pass away. One estate tax strategy is to consider a trust or use the annual gift tax exclusion. These strategies can help reduce the potential tax burden on your estate with the aim to give more of your assets to your heirs.
In conclusion, nurses have many tax-efficient strategies to consider for retirement. Examples include retirement accounts, managing RMD’s, investment strategies, and estate planning tax strategies. Because tax law is complex and ever changing, consider speaking with a tax professional or Financial Advisor for guidance. One part of a healthy financial plan is managing taxes efficiently. By considering tax-efficient tax strategies, nurses can help optimize their retirement income.
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These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided. This information is not intended to be used – and cannot be used – to avoid penalties under the Internal Revenue Code. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index. Individuals cannot invest directly in an index. The index return assumes reinvestment of all distributions and does not reflect the deduction of taxes, fees, and expenses. Withdrawals and loans from a life insurance policy reduce the death benefit and cash value, may increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss. Life insurance is not a retirement plan, investment, or savings account.
Georgene Collins, RICP®, RN, PhD, MBA is a registered nurse turned Financial Advisor at Airey Financial Group. Georgene helps other nurses take control of their finances and prepare for retirement. Georgene began her career with Airey Financial Group in 2017 after retiring from 30 years in healthcare.
Georgene holds the Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services. She holds health and life insurance licenses and a long-term care certificate in Indiana and Illinois. Georgene is a Registered Representative and Investment Advisor Representative and has earned the FINRA Series 63 and 65 registrations.