One of the most popular ways to reduce your tax bill in the current year is by putting some money away in tax deferred retirement accounts. That is an incredibly good strategy that our staff at Wasatch CPA Services highly recommends for you if it truly fits your financial goals. Yet we can\’t stress enough that this strategy isn\’t right for everyone, and in fact often turns out to cost you more in the long run. Many people reach retirement and find:
- they no longer have children to help lower their tax bill
- their taxable income increases as they lose deductions they\’ve previously claimed
- the tax rates have changed (and where we are now suggests the future will have higher taxes)
All of this often pushes them into significantly higher tax brackets when they start enjoying the money they put away. It is not uncommon for people to save a couple thousand dollars a year on taxes through tax deferred strategies only to find themselves paying tens of thousands of dollars on that money in retirement.
An alternative we find often works better: tax advantaged strategies! These are strategies that allow you to put away money in retirement accounts after you have paid taxes on it and later take that money and its growth out tax free. Some common options people regularly use include:
- Roth IRAs
- Roth 401(k) Accounts
- Whole Life Products in many varieties
Another alternative is looking at some more complex solutions, such as trusts and estates, real estate, opportunity zones, etc.
The biggest key here is to recognize taxes have a huge impact on your retirement, and there is no \”one-size-fits-all\” solution for how you need to minimize your tax bill. Since taxes can and usually are the biggest liabilities you\’ll pay, you need to spend time properly planning for your tax bill, considering both the present and the future. I also recommend hiring experts to help you with it, especially when you own a business. If you truly want to be prepared, you\’ll want a financial planner and a tax planner that can work well together in planning for keeping your taxes as low as possible while maximizing your retirement.