3 Things Every Good Retirement Plan Includes
When making a retirement plan, it's natural to focus on how much income you want to generate during retirement (bonus points if you also totted up your likely retirement expenses). While these are indisputably important details in any retirement plan, they're not the only issues you'll need to factor in.
Hitting your retirement income goals won't do you much good if you're handing over way too much of that income to the federal government. While there are steps you can take during retirement to reduce your tax burden, working tax planning into your overall retirement plan can greatly increase your options.
For example, creating nontaxable sources of retirement income will not only lower your federal and state income tax bills, it can also help ensure that your Social Security benefits are not taxed. Of all the potential sources of nontaxable retirement income, a Roth IRA is the hands-down winner. A Roth account's tax benefits are basically the opposite of a traditional retirement savings account's: you don't get a tax break on your contributions, but the money you withdraw from the account is tax-free. A not-inconsiderable side benefit of this system is that dividends and interest you receive in your Roth account are never taxed (dividends and interest paid into a traditional IRA or 401(k) are not taxed when they come in, but you do pay income taxes on this money when you take it out of the account).
Source: Fool.com