Beating Taxes in Retirement Savings


Throughout our working lives, a portion of our paychecks goes to taxes. The tax rate is determined by income, and what we owe is dependent on our salaries. While it is possible to lower taxes through various means, such as contributing to a retirement plan or deducting mortgage interest, our salaries are the single most deciding factor when it comes to the taxes we owe.

The script is flipped when we retire. Without that monthly paycheck, taxes owed are determined by what we spend, where we receive additional income, and what our tax liabilities are. Retirees have spent their entire working careers saving money for retirement, and taxes can impact the overall value of those savings. How can retirees minimize tax impacts once they stop working? There are several proven methods to reduce tax bills while maintaining a comfortable lifestyle. Read on for more details.

It’s Time to Diversify

If you’re still working, it is time to get serious about reducing taxes once you retire. One of the very best ways retirement planners suggest to go about this is to diversify – spreading contributions among multiple retirement accounts. These can be Traditional or Roth IRA as well as other taxable accounts. Roth IRAs, in particular, offer tax-free withdrawals once a certain age is reached. Securities one sells from a taxable account may also be eligible for capital gains deductions. Don’t forget that reducing the amount of tax you currently pay is also possible by making contributions to tax-deferred IRAs and 401(k) plans.

Take Advantage of Retirement Timing

If you haven’t gotten around to diversifying your retirement savings, fear not – there is still a solution available. Retirement planners refer to the time period between retirement and the age of 70 ½, when minimum distributions are required by law, as the “sweet spot”. During this period, retirees can take advantage of tax savings. How? In those first retirement years, it is possible to convert Traditional IRAs into Roth IRAs. This ensures that distributions can be taken tax-free when it is time to pull money from those retirement accounts.

Once Required Minimum Distributions (RMDs) kick in, a person’s tax bracket may change. A solution to avoiding a big hit in taxes is to start spending some of that retirement savings by making withdrawals in the first years after retirement. This has a two-fold effect: it reduces the balance in the account, thus lowering the balance that will be subject to RMDs and their associated tax implications, and it can also push back filing for Social Security benefits. This latter effect has a nice bonus, too, by enlarging the Social Security benefits available. For every year one delays filing for Social Security after reaching the age of retirement (typically 65-67 years), benefits grow by 8% up until the age of 70. That “sweet spot” turns out to be very sweet, indeed!

Prioritizing Withdrawals

Retirement planners and financial advisors have more wisdom to share with retirees. Typically, the common method for reducing taxes in retirement is by spending first from any taxable accounts and saving distributions from tax-deferred or tax-free accounts for later. Money in those tax-free accounts, particularly in Roth IRAs, will continue to earn compounding interest as well. A retirement planner or tax advisor can help you determine which accounts to begin drawing savings from and when; the process can be extremely complicated, but with a little professional help, it is possible to save considerable money on taxes.

Contributing to Retirement Accounts after Retirement

Once they quit working, many retirees believe that they can no longer make contributions to retirement accounts. Age is one determining factor; past the age of 70 ½, one can no longer contribute to a Traditional IRA. However, you can contribute to a Roth IRA for as long as you wish after retirement, provided you are earning enough income to cover the amount contributed to the plan. Retirees who wish to take advantage of these late-in-life contributions may take on a part-time job to ensure income eligibility.

The more you contribute to a Roth, the more compounding tax-free interest you will earn. This serves to stretch retirement savings for as long as possible, and may even earn you a decent chunk of additional savings in the process. Another benefit is that these late contributions to Roth accounts are ideal for those who wish to pass some of their savings to their children or other named beneficiaries.

Manage Deductions to the Fullest Extent

There are still tax deductions available for retirees. Though the tax code has changed for tax year 2017, retirees may still be eligible to deduct medical expenses, provided those expenses exceed 10 percent of adjusted gross income, regardless of the age of the person.

Other tax deductions can come from charitable contributions, property taxes, mortgage interest, and similar expenses. A tax advisor can help you figure out which deductions you are eligible for and how to get the most of these deductions in saving money after retirement.

Reducing Property Tax Implications

Many retirees have managed to save considerable money in retirement accounts over the course of their working careers. They’ve managed to take advantage of tax deferments as well as tax-free plans like Roth IRAs in the process. One aspect a lot of retirees overlook is the cost of property taxes. Paying tax on the properties you own never stops; and smart retirees look for ways to reduce these sometimes-staggering annual bills.

There are two related ways of reducing property taxes: relocation and downsizing. Moving to an area that has lower property taxes, such as suburban or rural locations rather than urban centers, can substantially reduce property tax implications. Downsizing a residence has the same effect. By moving to a smaller house, an added benefit is that profits obtained in a sale can be used to stretch retirement finances, too.

Final Words on Reducing Retirement Taxes

As illustrated above, there are many methods by which retirees can reduce their tax implications once they stop working. With any retirement plan, seeking the help of a professional can be of great benefit. Retirement planners and tax advisors are familiar with the steps needed to minimize taxes, helping you to get the most out of your retirement savings.

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