No matter when you plan to retire, taxes need to be part of your planning. This site does not provide tax advice. We encourage you to consult with a tax professional before making any investment decisions for tax reasons.
Tax-advantaged investing Employer-sponsored retirement plans, IRAs, or tax-exempt investments may offer certain tax advantages that make them sound investment alternatives for retirement planning. But you should realize that taxes and penalties may apply to certain withdrawals from IRAs or retirement plans. And even if an investment is said to be "tax exempt" or "tax free," a portion of the income may be subject to state and local taxes or the alternative minimum tax.
Taxes and retirement planning Your taxable investments may generate income and capital gains. If you need to dip into your investments to pay the taxes on these amounts, doing so will reduce your after-tax return. Realistic retirement planning should be based on your after-tax return—not on the higher return you earn before you pay your taxes.
Will your tax bracket be lower? Many people assume that they’ll need less when they retire because they’ll be in a lower tax bracket. But few find it easy to live on the reduced income it takes to qualify for this supposed tax advantage. What’s more, since your income needs to increase yearly to keep pace with inflation, even if you start in a lower tax bracket, you may creep into a higher one over time.
Whatever your age, the sooner you start investing, the longer your money can work for you. Even if you are in your 20s or 30s, it’s important to focus on retirement now.
