Most Americans are unaware that when they begin drawing Social Security can have a huge impact on how much they will receive over their lifetime. An equal amount of those who will draw Social Security are unaware they may have to pay taxes on those benefits. In fact, about 56 percent of Americans do pay taxes on their Social Security benefits, however, Social Security tax treatments are typically more favorable than the tax treatments for traditional IRA or 401(k) withdrawals. Further, there are things you can do now, even if you are only in your thirties, forties or fifties to ensure your retirement years are not fraught with financial difficulties.

Consider a Roth Conversion

While not every person in America is able to contribute to a Roth 401(k) or Roth IRA, some can benefit from a Roth IRA’s tax-free growth potential. Existing money from a traditional IRA or workplace retirement savings account can potentially be converted to a Roth IRA account (a partial Roth conversion). Remember, withdrawals for a Roth account are potentially tax-free. What this means is that you might consider converting only the amount which would bring you to the top of your current federal income tax bracket, as it will be considered taxable income.

Planning Ahead by Delaying Your Social Security Benefits

Every year you delay drawing your Social Security benefits past your full retirement age (66, or 67, depending on the year of your birth), you can get up to an 8 percent increase in your annual Social Security benefits. Your best strategy is to develop both short-term and long-term retirement goals, which could include Roth conversions, delaying your Social Security benefits and even establishing and using a 529 savings plan for your children or grandchildren’s education.

 How Could a College Savings Plan Affect Your Retirement?

Consider that withdrawals from 529 plans (largely considered college savings plans) are not taxed at the federal level, as long as all rules for qualifying expenses are properly followed. You will also want to plan ahead as far as how you will withdraw 529 funds, and how you will use them. In the past, 529 plans were only for college, however, as of 2018, up to $10,000 of these funds can be spent on tuition expenses for elementary, middle or high school.

You are allowed to save up to $15,000 per parent in a 529 account, and grandparents are also allowed to contribute up to $15,000 per year. That being said, 529 accounts can be “super-funded” with a contribution up to $75,000 per person, however, this type of super-funding uses up the federal gift-tax exclusion for five years. In other words, you can avoid taxes on your own IRA or 401(k) retirement plans, by putting more money into a 529 account for your children or grandchildren.

This money must, however, be used carefully, in the manner in which it was intended. Tuition, fees, room and board, books, supplies, computer costs and other school-related special services which are not covered by tax-free educational assistance can be covered by a 529 account. It is important to note that you are not allowed to claim expenses which exceed the school’s estimates for such things as room and board. In other words, your child or grandchild cannot live in an expensive apartment off-campus, which exceeds the school’s estimate for housing.

You will want to plan carefully, to avoid having money left over in a 529 account which you are unable to spend. You might choose to leave the money in the account in anticipation of a child or grandchild attending graduate school, or you might decide to change beneficiaries to avoid any tax consequences. Spending your 529 accounts in the smartest way possible can have an impact on your future retirement benefits and taxes on those benefits. To ensure you are planning in the best way possible for your retirement, consider speaking to a knowledgeable attorney from the Martinson & Beason firm.

Call Martinson & Beason Today

If you find yourself in a situation where you are unsure of how to maximize your retirement benefits, it could be highly beneficial to speak with an experienced attorney from the Martinson & Beason firm. We offer personal attention and are dedicated to our clients and their futures.  If you need legal help to plan your retirement in a way that maximizes your benefits, contact the knowledgeable, dedicated Alabama attorneys at Martinson & Beason.