How To Save Money On Taxes In Retirement

How To Save Money On Taxes In Retirement

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Written by Debra Taylor

Whether your retirement is just around the corner or you are already living the dream, there are several ways to save money on taxes so that your overall retirement income is not drastically affected. Is there such a thing called taxes in retirement?

Yes, it exists. A significant portion of your Social Security benefits will likely be taxed. For example, an amount withdrawn from your 401(k) plan or traditional IRA plan is taxable. In addition, investments in your regular brokerage account may also be taxed on dividends and capital gains. Want to make your retirement years less stressful? Below are some methods to save more after retirement taxes:

Know Your Tax Bracket

How much income tax an individual pays for their retirement account distributions typically depends on the tax brackets they fall under. It is important to note that these brackets account for all taxable retirement income, e.g., Social Security benefits. In most cases, one’s additional retirement income can potentially push them into a higher tax bracket. That’s why retirees should take all other retirement income sources into consideration and strategically withdraw their retirement savings to stay within their ideal tax brackets; avoid paying more than they have to in taxes.

Start Tax Planning as Early as Possible

In order to pay lesser taxes in retirement, it is beneficial to learn how different retirement income sources are taxed by the government. One of the most overlooked sources is a person’s Social Security benefits. By starting tax planning prior to retirement, to-be retirees may find it easier to reduce the amount of taxable Social Security benefits. There are two main types of tax bracket planning:

  • Annual: Tax deductions and rates change on an annual basis. If you perform tax planning in the fall of each year, you can uncover valuable tax planning opportunities.
  • Long Range: This type of tax planning allows individuals to coordinate withdrawing certain sources of income with their Social Security benefits to acquire more after-tax income.

Open a High-Deductible Health Insurance Plan

If you own a high-deductible health insurance plan that meets the IRS’ guidelines – the deductible must be at least $2,700 for a family plan and $1,350 for an individual plan – you may open a health savings account (HSA). Eligible individuals can then allocate funds in pretax and let it grow tax-deferred, provided they spend money on qualified health costs. The latest annual HSA contribution limit is $3,500 for an individual and $7,000 for a family plan.

Invest in a Roth IRA Account

One of the most straightforward ways to trim taxes in retirement is to put money into a Roth IRA. By adhering to official rules and guidelines, contributions and savings can come out tax-free in retirement. To open a Roth IRA account, individuals can convert a traditional IRA to a Roth, contribute to a Roth 401(k) via their employers, or contribute to a Roth IRA (must meet income and contribution limits). No option is perfect; unlike 401(k) plans that provide an upfront tax break, individuals have to put money into their Roth IRA after paying taxes on it. This means that the tax break comes later.

If you’d like to discuss any kind of planning for retirement, taxes, insurance planning, or some other financial strategy, contact us today to schedule a 20-minute complimentary phone consultation.

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*Disclosure: Converting from a traditional IRA to a Roth IRA is a taxable event.*

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How To Save Money On Taxes In Retirement

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