Tax implications when planning your retirement

There’s more to retirement planning than how much you need to save, or when you can say goodbye to your 9-to-5. Whether you‘re building up your nest egg or drawing it down, taxes are a key piece of the puzzle.

“The road to retirement is a bit more complex than just throwing your briefcase to the side,” says Ajene Oden, a Global Investment Strategist at J.P. Morgan Wealth Management.

“Some folks might still be in the saving phase, contributing to accounts earmarked for retirement,” Oden explains. “Next is what we might describe as the growth phase, when your money is already invested and doing its work to hopefully grow before you enter the final phase, where you’re taking withdrawals out of those retirement accounts.”

Throughout every stage of retirement planning, there are different tax implications to consider.

One size doesn’t fit all tax bills

We recently surveyed our LinkedIn following to better understand what our audience finds the most challenging part about retirement planning. The survey revealedOpens overlay “tax implications” to be the top vote amongst our followers.

The tax rules you have to navigate as you plan for retirement can seem impenetrable, particularly since they vary based on several factors. Tax advantages differ depending on your retirement planning product, be it a 401(k), individual retirement account (IRA) or health savings account (HSA). And if you wind up taking early withdrawals, those come with their own set of rules and penalties as well.

“Accounts like IRAs and 401(k)s, whether they are Roth or [traditional], and HSAs usually allow investors to compound the growth of their investments tax-free,” says Oden. “For [traditional] and Roth retirement accounts, money may go in or come out tax-free, depending on the type of account and your qualification. For the HSAs, which have to be paired with a qualified health plan, you can get triple tax benefits if the funds are used on qualified health care expenses – they may be entirely tax-free on contributions, investment growth and withdrawals.”

An individual can also have more than one type of retirement account, adding another layer of tax implications to the mix. For example, many investors have a traditional IRA and a Roth 401(k), Oden adds.

The intricacies don’t end there. During the contribution phase, your current household income may affect your ability to get deductions on contributions to a traditional IRA or to contribute directly to a Roth IRA.

Then, in the withdrawal phase, choices abound. You can wait until the government requires you to take minimum distributions or start drawing down as soon as possible.

There are a lot of moving parts to a successful retirement plan. But it’s up to you to understand the tax advantages you can harness to make the most of your retirement accounts and help you reach your long-term goals.

Help is not far from reach

Taxes add another layer of complexity to the elaborate equation that is retirement planning. But on the bright side, you don’t have to solve it all alone.

“Every situation and strategy is going to be different,” says Elyse Ausenbaugh, Head of Investment Strategy at J.P. Morgan Wealth Management. “I might be decades away from retirement, but there’s no harm in planning for it now.”

Financial advisors can help you think through the key considerations to build a plan. Consider coupling that with help from a tax professional or an accountant to maximize your plan’s effectiveness. Reach out to a J.P. Morgan advisor today.

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