3 ways to minimize the tax burden on retirement income

2. Develop a financial withdrawal plan to ensure that a client stays in a lower tax bracket: Many retirement investments are tax-deferred, so retirees are only taxed on the funds when they make withdrawals. Planning in advance, developing – and sticking – to a budget can ensure an individual doesn’t move into a higher tax bracket.

3. Invest in a Fixed Indexed Annuity (FIA): Annuities, in general, offer real tax benefits. In general, individuals purchase fixed indexed annuities in one payment. The account value grows tax deferred at the guaranteed rate. The earnings are taxed as ordinary income only when the individual makes withdrawals. “Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate,” according to CNN Money.

An FIA, in particular, can be an especially good choice as this type of annuity provides low-risk to principal and offers a reliable guaranteed income for life. FIAs can also help individuals minimize taxes, since they’re tax deferred and allow the annuity to grow quickly. FIAs also don’t have government-mandated annual contribution limits that other retirement vehicles have, like a Roth IRA.  Once an individual begins to withdraw funds, only the interest from the principal is taxed – not the principal itself. Any distributions from an FIA are subject to ordinary tax, but if an individual withdraws from the FIA before age 59-1/2, he or she will owe an additional 10 percent federal tax.