Retirement Tax Planning: Understanding Potential Tax Advantages of Retirement Plans

Did you know that saving for retirement can bring you financial benefits today? If your savings strategy takes retirement tax planning into account, you may be able to reduce your current tax burden.

1. Consider tax-sheltered contributions.

• Lower your current income taxes now

When you set aside a tax-sheltered percentage of your paycheck in a retirement plan, you're reducing the amount of overall income that will be taxed at the end of the current year.

• Pay taxes later

If you choose to make tax-sheltered contributions to your retirement account, you won’t pay taxes on the amount you contribute — or your employer's contributions — until you make withdrawals during retirement.

• Claim housing allowance in retirement if you contributed tax-sheltered contributions while working as a minister.

Upon retirement, if you’ve ever worked as a minister, you may be able to benefit from this very important tax benefit!

The IRS allows ordained, licensed or commissioned ministers who are retired to exclude some or all of their retirement income from a denominational pension board, such as GuideStone^®, as minister’s housing allowance. Some rules and limits apply. GuideStone members can find out more about this benefit in Ministerial Tax Issues.

2. Consider Roth contributions.

• Pay taxes now, but you may be eligible for tax-free, qualified withdrawals later if you choose Roth contributions.

If you choose to save for your retirement through Roth contributions, then your investment earnings may be tax-free¹ if they meet the requirements of a qualified withdrawal.² Plus, whenever you receive your retirement income, you've already paid taxes on Roth contributions, so this income will not count toward your taxable income in retirement years. This can be a good option if you expect to be in a higher tax bracket during retirement and you can afford less take-home pay now.

• Lower your income taxes later by choosing Roth contributions now.

Roth contributions put control in your hands about when you pay the IRS. Paying them now in a lower tax bracket, with the expectation of moving to a higher tax bracket, will put tax dollars back into your pocket in the long run.

Learn more about the differences and advantages of tax-sheltered vs. Roth contributions.

3. Claim the Saver's Credit if you qualify to increase your tax refund.

You may be eligible for a tax credit (called the “Saver’s Credit”) if you’re a low- or middle-income taxpayer saving for retirement through an IRA, 403(b) or 401(k) plan. The amount of the credit you can get is based on the contributions you make and your credit rate.

Your retirement plan is designed to support you both now and in the future. As you consider your options, keep in mind how each choice can contribute to your retirement tax planning and help you steward your resources wisely over time.

For more information, contact us at Info@GuideStone.org or 1-888-98-GUIDE (1-888-984-8433), Monday through Friday, from 7 a.m. to 6 p.m. CT.

¹Roth distributions are not taxable if the account has been held for five years and the participant is over age 59½, deceased or disabled.

 

²This information applies to tax-sheltered contributions and Roth elective deferrals within an employer-sponsored retirement plan. Not all plans offer Roth options. See your employer for details.

 

This educational information is not intended as legal or tax advice. Eligibility for the minister's housing allowance exclusion is subject to IRS rules and individual circumstances. Ministers or churches with specific legal or tax questions should consult a legal or tax advisor who understands ministerial tax issues.

The suitability of tax-sheltered or Roth contributions depends on individual circumstances. Tax laws and regulations are subject to change. Future tax treatment of retirement assets may differ from current law. Investors should consult their tax advisor regarding their individual circumstances.