Retiring Within 10 Years? 3 Tax Moves to Make

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KEY POINTS

  • It's important to go into retirement confident in your level of savings.
  • Catching up in different accounts could not only set you up with adequate income, but also help you reap tax savings along the way. 

Make sure to cross these off your list.

Retirement is a period of life to get excited about. After all, it means getting to live on your own terms without being bound to a job. 

But the closer you get to retirement, the more you might need to buckle down on the savings front. And these moves could help ensure you're not only set financially for retirement, but that you benefit from a tax perspective along the way.

1. Make catch-up contributions in your IRA

Ideally, you'll be nearing retirement with a decent chunk of money in your IRA account. But it certainly wouldn't hurt to pad your long-term savings, especially if you're not so confident in the amount you have socked away.

Fidelity recommends having 10 times your salary saved by the time you retire. So if you're within 10 years of retirement and you earn $75,000 a year, it means you'd ideally want a $750,000 nest egg. 

Now, all isn't lost if you haven't saved that much. There are ways you can compensate for having less savings, such as relocating to a less expensive part of the country or working part-time as a retiree to generate income. 

But if you have an opportunity to make catch-up contributions in your IRA, you should probably do so. Those are worth $1,000 a year, and while that may not seem like a ton of money, every little bit helps. Plus, that's an extra $1,000 of income the IRS won't get to tax you on along the way.

2. Fund an HSA if you're eligible

Healthcare is commonly a major expense for retirees. So it pays to pump money into a health savings account, or HSA, if your health insurance plan is compatible with one.

The great thing about HSAs is that you don't have to use up your plan balance year after year. You can invest money you don't need right away and carry it into retirement. 

This year, HSA contributions max out at $4,850 for workers 55 and over with individual health coverage, or $8,750 for those 55 and over with family-level coverage. And the money that goes into your HSA isn't taxed, so you get that benefit, too. Plus, HSA withdrawals are tax-free as long as that money is used to pay for qualified medical expenses.

3. Convert some retirement savings to a Roth IRA

Maybe you've saved in a traditional IRA all your life because you wanted to get a tax break on your contributions. Now's the time to think about converting some of that money to a Roth IRA.

Unlike traditional IRA, Roth IRA contributions don't result in an immediate tax break. But Roth IRA withdrawals are tax-free, whereas traditional IRA withdrawals are not. 

Money might get tight or harder to manage in retirement. So not having to pay taxes on some of your income could be a huge perk. 

Now to be clear, when you do a Roth IRA conversion, you move over a sum of money you must pay taxes on immediately. So moving $20,000 from a traditional IRA to a Roth will mean owing taxes on that money this year. But you won't owe taxes on it later, so if you can swing that near-term tax bill, it may be worth it.

It's a good idea to do your share of retirement planning from an early age. But as that milestone nears, it's especially important to focus on it. All of these moves could set you up for financial success in retirement, so they're worth putting on your list.

Our Research Expert

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