4 tips to reduce taxes when retiring in the USA

For many of us as Latinos, the day-to-day is what governs our lives and planning is something that we know is necessary and important but normally it is not on the list of priorities in the face of today’s storm of priorities, so the tomorrow seems to be something that can always wait. (Roth Ira)

But the reality is that the years go by faster than we would like and after so many years in the world of personal finance we still haven’t met the first person to tell us that running out of money when retired is something that I wouldn’t lose any sleep over them and we know that no one wants to be the old man who depends on his family financially.

1.- Don’t have a ROTH IRA account?

We know that many of you are wondering: What is this ROTH IRA account and what is it for? So let’s start there: imagine that Uncle SAM told you I’m going to allow you to save a certain amount every year and you invest it, giving you as a benefit that all the profits you have from these investment accounts do not pay taxes, thus allowing your money to grow faster by not having to pay taxes, not even when you go to withdraw your money from this Individual Retirement account (IRA).

Although it sounds like it’s too good to be true, it’s a reality, but like all good things, they say that little is good, so you can only contribute up to $6,000 a year to this account (for the year 2021 ) and $1,000 more if you are over 50 years old, all depending on your annual income level, and that is where we suggest reviewing this point with your financial advisor.

The ROTH IRA account is considered by tax specialists as the main strategy to be able to reduce your taxes in retirement, remembering that the money you take out of it is not considered as income and you will not pay taxes.

2.- In the variety is the taste

Most of our clients have understood that they should not leave all their money in a bank account because it would be at the mercy of inflation, so they have gone from savers to investors and have an investment account, I feel this is a great advantage, but we must go a little further. In the United States, everything that allows you not to pay taxes legally, even for a while, is a blessing. So in addition to the ROTH IRA investment account, it would be convenient to have a 401K or Traditional IRA, the latter being like a cousin of the ROTH but the Traditional IRA comes with two different features:

a) The money you contribute helps you pay less tax today, since it is subtracted from your income, it is as if what you contribute to this account you had not earned and you are not going to pay taxes for this part.

b) Everything good has a price, the money you invest will grow without paying taxes on profits, but when you take it out now you are going to pay taxes on the amount you withdraw, since it will be considered as income again.

In this case, the ideal would be to have the 3 varieties of accounts: A 401k or Traditional IRA, a Roth IRA and a traditional investment account; According to a Fidelity report “if you manage to have these three accounts and withdraw a proportional amount from your 401 or IRA account and your traditional investment account, leaving the ROTH IRA last, you can reduce your taxes by up to 38%, not bad for the time of withdrawal.” Ask your advisor or financial planner how to implement these strategies.

3.- It is not good to become retired with mortgage debt

Of course, while you are working there is no greater advantage than having a mortgage at low rates, but when retirement time comes and you are not producing the cost of your mortgage it will be one of your main expenses, which may force you to you have to sell assets from your investments with capital gains and pay taxes or maybe you have a 401K or IRA account, which we talked about in the previous point, and every time you take money out of them you have to pay taxes. So it is good to get this number in detail to see what is most convenient.

4.- If you only have a traditional investment account

We know that, for many Latino immigrants, knowing about all these types of retirement accounts is not the most common thing, as it is the case of most Americans by birth who barely enter a large company and open a 401K plan for them. for retirement, where the company contributes what we call “free money” and the worker makes contributions from his salary.

So we suggest that if you have shares or investments that have risen a lot in the same year you bought them, remember that if you sell them that same year, it would not be the most convenient since you will pay a higher tax than if you wait until you have more than one year with that investment.

We know that the world of investments and taxes in the USA are not easy at all, but we hope that these 4 tips will let you know that there are strategies that you can prepare to maximize your money when you are retired and thus achieve your Financial Independence.

Always remember to consult these points with your tax specialist or your financial advisor and planner.