4 Tips to Lower Taxes in Retirement

The number one fear of retirees today is running out of money in retirement. And reasonably so, as retirement is like spending 20 to 30 years in unemployment. A recent study found that the average American between ages 55 and 64 have saved $104,000 for retirement. Have you calculated how much you will need to retire? There are many factors retirees often miss when creating an income plan and one factor that may make the fear of running out of money in retirement a reality is failing to plan for taxes in retirement. We consistently meet with people who are looking for help to lower the taxes they pay in retirement and we’ve outlined 4 simple tips you may want to consider and apply to your situation:

  1. Identify Your Current & Future Tax Bracket: If your income dips into a higher tax bracket, you may inadvertently increase the tax you pay on your Social Security income. You may want to consider prepaying some deductible expenses before the end of the year or defer any taxable payments.
  2. Plan Strategic Withdrawals: Best time to start taking control of your future tax bracket is in the years leading up to retirement.  At age 70 ½ you have mandatory withdrawals from all your retirement plans (called required minimum distributions) and these can push you into a higher tax bracket.  In order to minimize your future tax liability, slowly start drawing money from tax-deferred accounts before you retire and pay the taxes now.
  3. Maximize Roth Contributions Over Time: This is a great tool if you believe your tax rate is lower now than it will be in the future. Another benefit is that Roth IRAs are not subject to required minimum distributions (RMDs) when you reach 70 ½.
  4. Benefit of Taxable vs. Tax-Deferred Accounts: It may make sense to keep the bulk of your stock investments in taxable accounts and keep your fixed income investments in tax-deferred accounts. With taxable accounts, you pay ordinary income taxes on short-term gains but lower long-term capital gain rates when those investments increase over time.