Retirement should be a time for rest, leisure, and pursuing things you didn't have time for during your working years. One thing you don't want to worry about is paying excessive Arizona retirement taxes. Taxes are a part of life, but you want to avoid opening yourself up to unnecessary tax liabilities during your golden years.
With these tips, you can give yourself a secure financial situation for your retirement.
1. Avoid Building a Tax Timebomb with Tax Deferrals
When you have a long, complex to-do list, putting things off is tempting. You get the temporary benefit of not doing a task. The same thing applies to your tax-deferred retirement accounts. You are just putting off paying the Arizona retirement taxes you owe on your money.
However, you should always remember that tax deferral is not equal to tax-free. Eventually, you will need to pay your taxes. If you leave these accounts alone and let them grow, then make substantial withdrawals, you could have a tax problem. These withdrawals are taxable income.
Tax-deferred accounts have required minimum distributions (RMDs), which means at some point, you must take money out of these accounts. However, if these RMDs are too large, you could end up in a higher tax bracket.
That isn't ideal for your retirement because it increases Arizona tax on your retirement income. This is not what you want at a time in your life when you’re not actively working and relying on your investments.
With tax deferral, you are banking on the idea that taxes will be lower than your current working year's rate. If your future tax rate will increase because of shifts in tax law or increases in your taxable income, this will increase your Arizona retirement taxes.
Think about the retirement benefits you receive from the government. While Arizona doesn't tax military retirement income from pensions, Social Security benefits are taxed at the federal level. If your taxable retirement income is too high, you could put more of your Social Security benefits at risk. Without the right financial strategies for retirement in place, you could avoid this pitfall.
If your tax-deferred retirement income increases your Modified Adjusted Gross Income (MAGI), this could affect your Medicare premiums—you could be paying more out of pocket.
2. Pursue Roth Conversions and Roth Retirement Accounts
Roth IRAs are favored by those who want to pay less Arizona taxes for retirees because after-tax dollars fund them. Withdrawals are truly tax-free, but can’t be made before you turn 59 ½ with an early withdrawal penalty. Still, this is a successful way to avoid taxes in Arizona as a retiree.
One of the most attractive features is that Roth accounts do not require you to take RMDs. This means you have more control over how and when you access your money throughout your lifetime. If you have existing pre-tax retirement accounts, consider a Roth conversion to take advantage of the benefits of a Roth account.
However, you should consult with a tax professional and financial planner to ensure your Roth conversion strategies make sense for your financial situation. Professional help will allow you to pay less Arizona retirement taxes.
Create a Big-Picture Financial Plan for the Future
Planning ahead to pay less Arizona retirement taxes is something you should do under the guidance of professionals, and ideally fiduciaries. Wealth management, estate planning, and retirement planning are effective when they are based on your goals and tax circumstances.
You must consider your assets and how your retirement income will affect you and your spouse. Proper financial management forces you to acknowledge all likely outcomes, including your eventual passing or even the passing of your spouse. If you file your taxes jointly, you may have enjoyed a lower tax rate, but if one of you passes away, the rate will increase for the survivor.
Do you have a financial plan that caters to this scenario?
Are your assets fully protected? How will they be divided among your spouse and other beneficiaries? You need to make sure you have the right documentation in place to reduce the potential tax burden they will face, if and when you pass away.
At Asset Preservation Wealth and Tax, we take a holistic view of our client’s financial situation. We have access to money managers and tax professionals to give you real insight into the best course of action. And, as fiduciaries, we’re legally required to always put your best interests first.
We aim to help you secure a stable financial future during your retirement. We give you that big-picture perspective, while checking on the details, and establish a strategy to help you achieve it.
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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