How to Save Money on Retirement Taxes
How to Save Money on Retirement Taxes


As you plan for your retirement, there are plenty of investment vehicles to help you build a nest egg for your “Golden Years.”

IRAs (available in several flavors); 401(k)s and profit-sharing trusts; stocks, bonds, and other annuities; and real estate and business investments are all excellent options to invest your savings for retirement.

But have you ever considered what taxes you might be responsible for paying after you retire? If not, you may be surprised to discover that much of your income – paid partly from your various investments – is still taxable even in retirement.

And if you don’t plan accordingly, you could wind up paying more taxes than necessary in retirement. Which is the last thing you want to do when living on a fixed income.

To avoid this less-than-desirable outcome, here are five savvy strategies to help you save money on your retirement taxes:

Park Your Money in The Least Taxable Spot

Interest earned from bonds paid into an investment account is assessed at the regular income tax rate (determined by your tax bracket). But if you hold those funds in a retirement account, which is taxed anywhere from 1% – to 12%, you minimize taxes on bond interest income.

On the flip side, it’s better to hold income earned from stocks and ETFs in an investment account, which is taxed anywhere from 0% – 20%, depending on your tax bracket.

In short, making careful and considerate decisions about where you park your money in retirement can help reduce your income taxes.

Invest In a Balanced Mix of Taxable + Tax-Deferred Accounts

Traditional IRAs are appealing because they reduce your annual taxable income. But taxes are due on those funds when you make withdrawals in retirement. This is a relevant concern because you’re bound to have years throughout your retirement when you need to withdraw more money. And this, in turn, increases your taxable income.

Meanwhile, withdrawing money from a Roth IRA, which is tax-exempt when you withdraw funds after reaching the age of 59 1/2, won’t increase your taxable income in a given year.

By spreading your savings among a range of retirement accounts, you’ll have options to minimize your tax liabilities.

Withdraw From a Mix of Accounts

It’s often tempting to drain your traditional IRA + 401(k) accounts first, as payments from those accounts are taxable. But if you can delay taking Social Security payments, thereby minimizing your income and keeping you in a lower tax bracket, you may be eligible for a Roth conversion.

With a Roth conversion, you can roll funds from a pretax retirement account, like a traditional IRA, into a Roth IRA. You may owe taxes following the conversion (due to regulations governing Roth conversions). But given that you’re in a lower tax bracket, your income tax liabilities will be smaller.

Conversely, when you’re required to start taking minimum distributions from traditional IRAs and 401(k)s (after 72 years of age), it’s best to prioritize those withdraws over Roth IRA accounts, as Roth accounts do not require minimum distributions during the account holder’s natural life.

Depreciate Your Real Estate Holdings

Whether you own your home, investment properties, or both, you can deduct depreciation on these assets from your income tax.

Depreciation is the practice of spreading the cost of a physical asset, which includes real property, over its “useful life.” Under the terms of depreciation, an asset’s value diminishes each year. And you can subtract that “spent value” from your taxable income.

Managing Your Medicare Premiums

Your Medicare premiums are based on your annual income—thus, the more income your tax return shows, the higher your Medicare premiums.

But funds withdrawn from a Roth IRA and loans against either real estate investments or life insurance policies are not factored into your annual income when calculating your Medicare premiums.

As such, relying on funds drawn from those sources helps keep you in a lower tax bracket, thereby reducing your Medicare premiums.

Have More Questions About Reducing Retirement Taxes?

Managing your money after you retire can be an incredibly challenging task. The fact that you’re living on a fixed income without the benefit of a regular paycheck is difficult enough.

But when you’re trying to navigate the tangled web of when taxes are due on which retirement investment accounts can turn into a confusing and overwhelming mess.

If you’re struggling to understand the tax implications of your retirement investments – Get in touch for a FREE consultation!


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