Retirement planning is more than stashing money in an account; it’s a legally and financially strategic game. As a tax attorney, G. Deffenbaugh has seen firsthand how tax law and legal planning intersect to help or to hinder your retirement goals. Let’s explore how to structure your retirement plan for maximum tax efficiency and legal protection.
1. The Legal Bedrock of Retirement Planning
Any solid retirement plan starts with aligning your retirement accounts with your estate planning documents. Outdated or misaligned documents can cause family conflicts and derail your intentions. Retirement accounts (like 401(k)s and IRAs) enjoy unique asset protection qualities depending on your state, which makes them powerful tools beyond just savings.
Also critical are powers of attorney. As you age, ensuring someone has the legal right to manage your finances or make decisions if you become incapacitated is essential. Without them, your loved ones may face court intervention just to access your accounts.
2. Tax-Advantaged Vehicles: Choose Wisely
Choosing between traditional and Roth retirement accounts hinges on your tax bracket now versus in retirement. Traditional accounts reduce your taxable income today, while Roth accounts offer tax-free withdrawals later.
Self-employed? SEP IRAs and Solo 401(k)s let you contribute more than standard IRAs, especially if your income is high. Don’t overlook Health Savings Accounts (HSAs) either. With a high-deductible health plan, HSAs offer a triple tax benefit: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses, even in retirement.
3. Mastering Taxes Before and After Retirement
Tax planning doesn’t stop at retirement; it shifts. Strategic Roth conversions during low-income years can lock in lower tax rates on retirement funds. And when you start withdrawing? The order matters. In some cases, pulling from taxable accounts with high basis first, then tax-deferred, and finally Roth accounts minimizes lifetime taxes. The order is highly dependent on each person’s specific goals and circumstances, and your team of professionals is your best resource for specific advice.
Required minimum distributions (RMDs) are another tax bomb. Plan ahead to avoid hefty tax bills or penalties once you’re required to start withdrawals (currently age 73 under SECURE 2.0).
4. Estate Planning & Retirement Accounts
Designating the proper beneficiaries is crucial; retirement accounts typically bypass wills, so an incorrect name here can cause chaos. With the SECURE Act eliminating “stretch IRAs” for many heirs, your children may face significant tax hits. Charitable giving strategies, like naming a charity as a beneficiary or setting up charitable trusts, can reduce your estate tax burden and allow you to leave a legacy.
5. Legal Pitfalls to Dodge
Common missteps? Not updating beneficiaries after life changes, and underestimating the income tax implications of retirement account withdrawals. A misstep here could cost your heirs thousands.
6. Stay Ahead of the Curve
The SECURE 2.0 Act raised RMD ages and expanded catch-up contributions, but more tax changes could be coming. Building flexibility into your plan, like Roth buckets and charitable options, helps weather whatever Congress throws your way.
7. Know When to Call a Pro
If your family situation is complex (think blended families or special needs dependents) or if tax issues are overwhelming, a professional can help you avoid irreversible mistakes. Contact G. Deffenbaugh today to get started.
Retirement planning can seem overwhelming, but done right, it can secure not only your golden years but also your legacy.