| Arizona Republic
How you can save a million bucks for retirementUSA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity Investments about what it takes to save a million dollars for retirement.(MONEY, USA TODAY)If you’ve had a toe in the stock market for more than a few years, you likely have grown increasingly giddy watching your profits pile up. But there’s a flip side to the story: Eventually, you might need to share a lot of those gains with your partner.If you have put money into Individual Retirement Accounts or workplace 401(k)-style plans on a pretax basis, as millions of Americans have, your investment partner all these years was Uncle Sam. When you start making withdrawals, your partner will want a share of the spoils.Taxes in sheltered accounts are easy to overlook if you have a long-term focus. But as retirement age approaches, the tax bill will come more into focus too, especially if tax rates start to rise. You might not be worth as much as you think.”Many households may forget that not all of these (investment dollars) belong to them,” noted Anqi Chen and Alicia Munnell, authors of a report on retirement taxes. “They will need to pay some portion to the federal and state governments in taxes.”Ed Slott, a certified public accountant and author of “The New Retirement Savings Time Bomb,” puts it more bluntly: Many retirement accounts are “infested with taxes,” he said.Retirement news: These Social Security changes affect your retirement age, taxable benefits and eligibilityMore: Why I always make prior-year IRA contributions to help with my taxesIn their report, Chen and Munnell, at the Center for Retirement Research at Boston College, estimated the tax bite on retirement assets for people in various income groups and assuming various drawdown or withdrawal strategies.They looked at Social Security benefits, pensions, 401(k) plans, IRAs and other financial assets, such as stocks held in taxable accounts. Rental properties, owner-occupied homes, small businesses and other investments also can be used for retirement, but the report didn’t examine those categories. Adding them to the mix could further inflate tax bills for many.The good news is that roughly four in five retirees and future retirees don’t — or won’t — face a large tax bite on the financial assets they receive or sell to finance their lifestyles, the researchers estimated, typically paying little or nothing in federal and state taxes.But for those in the top fifth or so on the asset scale, “taxes are an important consideration” that can eat up 20% or more of a person’s retirement income.Reviewing the basicsIt’s often smart to have money in accounts with different tax ramifications. “Like you diversify your investments, you want to diversify your tax strategies,” said Paul Axberg, a CPA and certified financial planner at Axberg Wealth Management in Sun City West.Money withdrawn from 401(k) plans and IRAs is taxed as ordinary income. Assets in Roth 401(k)s and Roth IRAs are an exception. Roth contributions are made on an after-tax basis, so withdrawals generally come out after tax, too. In traditional IRAs and 401(k) accounts, investors usually must start pulling out money as required minimum distributions that now start at age 72. Large withdrawals can make other income, such as Social Security benefits, partly taxable.Social Security benefits are tax-free for most recipients, but not for people exceeding certain income ranges — $25,000 and up for singles and $35,000 and up for married couples. Above those figures, depending on how much Modified Adjusted Gross Income you have, you would pay taxes on up to either 50% or 85% of benefits. MAGI includes regular AGI plus nontaxable interest income (such as from municipal bonds) and half of Social Security benefits.Tax and timing flexibility among accounts is important. “If you don’t have flexibility, you might need to pay taxes on your Social Security,” Axberg said.Other financial assets, such as stocks or mutual funds held in unsheltered brokerage accounts, can generate short-term gains taxable at ordinary income rates or long-term gains taxed at lower rates. Interest and dividends from these accounts usually are taxable, too. But there isn’t a requirement to start withdrawing from these accounts at any particular age.Focusing on strategiesWhile most people in or nearing retirement won’t face sizable tax bills, the situation could worsen if governments, especially at the federal level, push tax rates higher to deal with budget stress and surging deficits.One obvious strategy for people still in the workforce is to channel some retirement-plan contributions into Roth 401(k)s or Roth IRAs. You will forsake front-end deductions, but you would save on taxes down the road and won’t face the requirement of mandatory withdrawals. About 10% of assets in IRAs and 401(k)-style accounts are held in the tax-free Roth versions, according to data from the Internal Revenue Service and the Vanguard Group cited in the Boston College report. Another — and more painful choice — is to convert or transfer money from traditional 401(k)s or IRAs into a Roth. The pain comes from having to pay taxes on the amount you convert. Also, conversions make more sense when stock prices and other assets are low. When they’re high, like now, you would face taxes on higher account values.Yet another strategy is to make regular withdrawals past age 62 from your IRAs and 401(k)s, while holding off on claiming Social Security. Delaying Social Security often makes sense anyway in that your monthly benefits will rise the longer you hold off (up to age 70). Ideally, you don’t want to draw heavily from retirement accounts or other sources while also receiving Social Security, as the combination could push some of your Social Security benefits into the taxable category.More on Roth conversionsRoth conversions could become more popular if tax rates seem destined to rise. This is mainly a threat for high-income Americans (with income above $400,000) under proposals by President Joe Biden and congressional Democrats. But even less-affluent individuals with large retirement balances might consider them. Once you make a conversion and pay the taxes, the account is no longer subject to taxation.Converting to Roth accounts “removes the uncertainty about future higher (tax) rates,” said Slott, who recommends a series of conversions over many years to “get some of that money out at today’s historically low rates.”Robert Keebler, a CPA at Keebler & Associates, also suggests doing Roth conversions gradually, maybe once a month or quarter. You wouldn’t want to do a big one right before the stock market tanks, he noted in a talk sponsored by the American Institute of Certified Public Accountants. Doing a series of smaller conversions is like dollar-cost-averaging in reverse, Keebler said, referring to the popular strategy of buying in at various prices over time.And ideally, you’d want to pay the tax bill using outside money so that you don’t erode the value of your newly converted Roth account, he said.Reach Russ Wiles at firstname.lastname@example.org.