Three legal ways to protect your retirement savings from the IRS

Some of the money you save for retirement will be owed to the IRS.

retirement plan

If you start planning now, there are ways to protect your savings.


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1. Choose the right account

Most people won’t be able to avoid taxes on their retirement savings. Once you have an IRS retirement account, keeping them to a minimum isn’t too difficult. Read more about it here.

Retirement accounts are the best place to save because they offer tax advantages that taxable brokerage accounts don’t. If you contribute to a traditional IRA or 401k, you will get a tax break this year. However, you will owe taxes on your retirement withdrawals.

2. Switch to Roth IRAs

All retirement accounts have required minimum distributions (RMDs), with the exception of Roth IRAs. RMDs are mandatory withdrawals that you have to start taking at 72.

You can convert savings from other retirement accounts to a Roth IRA to avoid RMDs and taxes on what you’ve earned. In order to do this, you must pay taxes on the amount that you are converting that year. This is known as a Roth IRA conversion.

To make it easy on yourself, wait until the end of the year to do it. Be sure that the amount you are converting won’t push you into a higher tax bracket. You may have to spread out the transfer to avoid paying lots of taxes.

3. Borrow instead of taking early withdrawals

If you are in need of cash, an early withdrawal probably isn’t the best move. If you are under 59.5 years old, you will pay a 10% early withdrawal penalty unless you have a qualifying reason. If the money came from a tax-differed account you may face taxes upon withdrawal.

If your administrator allows it, borrowing from your 401k may be a better option. You won’t owe taxes on it as long as you pay it back with interest in a given time frame.


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