- 1). Invest in both a 401K and a Roth IRA. Both types of plans offer advantages. You will not have to pay taxes on the funds that you withdraw from the Roth IRA, but you can contribute more to a 401K.
- 2). Roll over your money when changing employers. When you do a 401K rollover, you deposit your retirement account money from one brokerage account directly into another fund's account. If the original brokerage makes a check out in your name, you'll have to pay taxes on the money as well as an early withdrawal penalty if you are under age 59 1/2.
- 3). Limit the amount of money that you withdraw in retirement to reduce retirement taxes. You only have to pay taxes on the money that you withdraw from your accounts, so it's best to only withdraw the amount of money that you'll need for living expenses. Careful budgeting can help you to estimate how much money you'll need each year.
- 4). Use the money in your Roth IRA first. Because the money in your Roth IRA will not be taxed, you should try to take as much money as you can from your IRA instead of the 401K. You will, of course, want some of your money to stay in the Roth to keep growing. While there's no set formula to determine how much you should remove from each account, try taking out amounts in proportion to the savings in each fund. For example, if your Roth IRA represents 25 percent of the total amount you have saved, take out 25 percent of the total amount of money you need for the year from the Roth IRA.
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