6 Ways to Lower Taxes in Retirement
Entering retirement brings many changes, but freedom from taxes isn’t one of them. You’ll still have to pay your debt to Uncle Sam every year. However, while you may not be able to avoid the bill, thoughtful planning can lower the expense.
Here are six ways to lower taxes in retirement.
1) Cut Your Expenses
Trimming your expenses is the simplest way to reduce your retirement tax bill. Before you retire, figure out the smallest income you feel comfortable living on. For instance, you could downsize into a smaller property that’s cheaper to maintain or take fewer vacations.
If you lower your spending enough, you can also lower your required income and move into a lower tax bracket.
2) Utilize Capital Gains Effectively
Do you own a brokerage account? You can add or withdraw money from your account at will without suffering a penalty. And, if your investments are successful, you might be able to realize nearly $100,00 in income tax-free! Married taxpayers filing jointly enjoy a 0% long-term capital gains tax rate for income up to $94,050.
Losing investments can cut your tax bill as well. If your losses are more significant than your gains, you can write off up to $3,000.
3) Contribute to a Roth IRA
A traditional IRA, 401(k), and Roth IRA are all examples of tax-advantaged accounts. However, while the first two are tax-deferred, a Roth IRA works differently. With this account, you contribute after-tax dollars and make tax-free withdrawals later on. Roth IRAs are also exempt from required minimum distributions (RMDs) unless the account is inherited.
Don’t worry if you already have a traditional IRA or 401(k) set up. If you decide that the tax benefits offered by Roth IRAs are worth it, you can easily convert your accounts. There will, however, be a conversion tax.
4) Remember Your RMDs
Converting to a Roth IRA might make sense, but there are also reasons to hold on to your traditional retirement accounts. This decision has tax implications, as you must pay taxes on withdrawals and can’t avoid it by letting the money sit in the account. Both traditional IRAs and 401(k)s are subject to required minimum distribution rules. That means you’ll have to start withdrawing funds after you reach a certain age.
You can keep your tax bill as small as possible by remembering your RMDs. If you forget, you’ll have to pay a penalty in addition to the tax on the withdrawal.
5) Donate to Charity
Retirees who own an IRA and are at least 70½ can lower their tax obligation with a qualified charitable distribution (QCD). The funds flow tax-free from your account to your chosen charity, reducing your IRA balance. The reduction will also lower your RMDs and lead to tax savings.
6) Consider Where You Live
High state taxes can drain your retirement savings. Consider retiring in states that don’t collect income taxes, like Florida and Nevada. Or, it might make more sense to think about states with low property taxes, like Alabama. Making the right move in retirement could ultimately make a big difference in your tax bill.
Final Thoughts
When you retire, proper income management becomes more critical. However, It’s easy to miss out on tax-saving steps. That’s why it’s a good idea to consult with a professional. The team at Kondler & Associates, CPAs, can examine your finances and provide strategies to reduce your retirement tax burden.
Contact us today to learn more!
