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Pre-Retirement Strategies for Retirement Bliss
This may sound funny, but retirement planning starts before retirement. As with any investment plan, the sooner you get started, the greater your choice of planning options and alternatives become. The same is true for the income tax aspects of retirement planning, which is the focus of this profile. The purpose of tax planning is for the taxpayer to pay the least amount of taxes that are legally permissible while still achieving their financial objectives.
Lessening the Tax Bite
John is very interested in reducing his current income taxes. Aren't we all? In light of his early retirement plans, he should first consider increasing his 401(k) contributions. This does two things. First, it reduces his current taxable income by the amount of the contributions. Second, the earnings in his retirement plan are not subject to taxation until he withdraws the funds. Consequently, the tax savings remain invested and compound his return.
There is a potential downside to this recommendation. John anticipates retiring before he reaches 59 1/2 and he does not have any other substantial savings on which he can rely to supplement his retirement income. Therefore, if he retires early as intended, he will undoubtedly need his retirement plan and will have to jump through a few hoops to avoid the early withdrawal penalty that I will discuss in the next section.
 Minimizing Taxable Income
back to Tax Strategies for Retirement
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