Do you want to retire early? Whether you're just trying to set a goal to leave the workforce a few years earlier than standard or whether you're part of the growing FIRE (Financial Independence, Retire Early) movement, one ally you need in your corner is a certified public accountant (CPA) to help with tax issues.
How can a CPA help you manage your taxes to boost your chances of early retirement success? Here are five key ways:
1. Timing the Tax Benefits. Retirement contributions can often be made in one of two ways: pre-tax or post-tax. Pre-tax contributions lower your current tax bill while post-tax retirement accounts lower your retirement tax bill. Balancing these two benefits means determining when to use tax reduction and whether to diversify your tax savings.
2. Avoiding Withdrawal Taxes. What taxes will you pay when you withdraw your money? If you plan to retire very early, as many in the FIRE movement do, taxes could be a real drain on your income. If you need to withdraw early from a 401(k) or traditional IRA, for example, you'll pay not only taxes but also penalties.
3. Determining Withdrawal Order. Anyone who has more than one source of retirement income planned should consult with a tax professional to decide in which order to withdraw that money. Should you take Social Security as early as possible? Drain your Roth IRA or a traditional IRA first? When should you claim a pension? There are no generic answers to these questions, as they depend on each retiree's circumstances.
4. Selling an Asset. Is there a large asset in your retirement investment portfolio? This could be a piece of rental real estate, the downsizing of your primary home, royalties, or a valuable collection. Selling it as part of your early retirement strategy can give it a big boost. But without good tax planning, taxes on a large one-time capital gain could put a large dent in the profit.
5. Minimizing Current Taxes. Even if you don't want to use up all your retirement account tax benefits now, you still need to lower your tax bill each year. This gives you more disposable income to put toward future plans. A qualified CPA will help you find ways to do this without negatively impacting your retirement goals.
Want to know more about tax issues surrounding your plans to retire ahead of the pack? Start by meeting with a CPA tax service that specializes in tax preparation in your state today.