- Avoid early withdrawals. Withdrawals from a 401(k) are taxed like regular income because such accounts are built up with pre-tax contributions. But there are ways to minimize your tax burden, and thus save money, when withdrawing from a 401(k). Avoiding early withdrawals, which are those taken before age 591/2, is one easy way to avoid a higher tax burden. Early withdrawals can trigger a 10 percent tax on top of the income taxes account holders will have to pay. By avoiding early withdrawals, retirees are building wealth by lowering their tax burden.
- Take the required minimum distribution when you must. Another way to avoid a tax burden that can diminish your wealth in retirement is to take your required minimum distribution (RMD) when you need to. The Internal Revenue Services reports that account owners who fail to withdraw the full amount of the RMD by the due date are subject to a 25 percent excise tax on the amount not withdrawn (the tax burden is 10 percent if timely corrected within two years). The IRS notes account owners must take their first RMD for the year in which they turn 73.
- Explore new ways to invest. The increase in expected retirement length underscores the fact that many retirees may need to abandon conventional wisdom related to retirement and risk. Though it’s still best for retirees to avoid particularly risky investments, they might need to accept a degree of risk that retirees did not have to take on decades ago. Simply put, longer retirements may require longer engagements with risk. Retirees can work with a financial advisor and conduct their own research to identify vehicles to grow their wealth without making themselves and their nest eggs highly vulnerable to market fluctuations.
- Embrace new income opportunities. Retirees may have more potential income streams than they realize. For example, passive income can be an effective way for retirees to earn money without going to great lengths. Retirees who travel for months each year and/or those who live in colder climates but spend winter in warmer locales can generate passive income by renting out their properties when they’re not at home. Retired professionals with decades of experience in their fields also can explore consulting or teaching opportunities that won’t require substantial time commitments but can still bring in money.
With expected retirement lengths on the rise, retirees are encouraged to find ways to grow their nest eggs so they can enjoy retirement to the fullest.
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