5 Ways to Reduce Taxes During Retirement

April 10, 2019  |  Michael Reilly

When it comes to managing your retirement income, you want to consider every possibility. No one wants to get caught off-guard during what could be a very relaxing, even luxurious time in your life.

Everyone deserves to enjoy their well-earned retirement income, which is why you need to be careful when it comes to managing taxes during retirement. If you make too many mistakes, you could end up putting a serious dent in the cash you’ll need to enjoy your golden years in style.

Fortunately, with some careful planning and a little knowledge, you can take advantage of some tricks that will allow you to avoid having too many slices of retirement income pie swiped by the feds. Here’s a few tips that you should start considering as soon as possible. The earlier you get started planning for retirement, the better.

Be Smart About Converting

You probably already know about the potential benefits of a Roth IRA or a Roth 401(k) as opposed to a traditional IRA or 401(k), but did you know you can efficiently convert from a traditional retirement account to a Roth if you’re smart about it?

This is something you should start thinking about long before retirement. If you’re someone with fluctuating income levels, you can use years where you’re in a lower tax bracket to efficiently avoid some of the tax costs of withdrawing from your retirement accounts.

Withdrawals from a Roth IRA or Roth 401(k) aren’t usually taxed as long you’re over 59½ and the contributions were made five years ago. However, withdrawals from traditional IRAs and 401(k)s will be taxed. Therefore, you should try to withdrawal from traditional accounts in years where you qualify for lower tax brackets and convert that income to a Roth equivalent. You’ll pay lower taxes at the time of the withdrawal and avoid them entirely down the line, when you need the money for retirement.

Diversify Your Retirement Income

When it comes to retirement income, you’ve got lots of options. Social Security, bonds, savings accounts, brokerage accounts, and so on…

Depending on the source of income, a withdrawal might be fully taxed, partially taxed, or not taxed at all. Having a lot of options will allow you more flexibility in staying under those lower tax brackets. You can withdrawal from some fully or partially taxed income sources until you’re nearing the switch to a higher tax bracket and then move to using a non-taxable source if you need to.

Use Your Required IRA Withdrawals for Donations

When you reach age 70½, you’ll have to start withdrawing from your traditional IRA, and that’s income that can be taxed.

Instead, you can use those forced withdrawals to donate to your favorite charities. You can’t also claim a deductible charitable contribution for the same amount, but it will allow you to meet your IRA’s minimum distribution requirements without incurring additional income tax and possibly rising above the next tax bracket.

Keep Taxes in Mind When You Move

Many people decide to relocate for retirement. If you’re one of them, you might want to take a look at homes in the seven states that don’t have state income tax. Specifically, Washington, South Dakota, Alaska, Texas, Florida, Wyoming, and Nevada.

If those seven states aren’t ones you’d be exited to move to, keeping tax conditions in mind when you pick somewhere to retire can make a big difference. Many states don’t tax Social Security, government pensions, or private pensions…so make sure you do some research.

Remember, you only have to spend a majority of the year in your “home state” in order for that to be the state you pay taxes to. Many retirees pick a home base with good tax laws and then use the extra savings for travel.

Make Every Effort to Pay Off Your Mortgage Before Retirement

Mortgage payments are by far the biggest expense for most retirees. If you’re having to withdrawal from taxable sources in order to make those payments you’re likely to end up in a higher tax bracket and lose even more money. A bit of pre-planning and a paid-off mortgage can save you a bundle down the line when you need the money most.

If you’re interested in receiving additional help managing your 401(k) or other retirement investments, don’t hesitate to contact one of our financial advisors here at Rowe Wealth.

We can use our Relative Strength and technical analysis techniques to ensure your savings are properly positioned for maximum growth based on your level of acceptable risk.

Don’t hesitate, the sooner you act, the more prepared you’ll be when the time comes to retire in style. Click here to see available appointment times.

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