April 9

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5 Ways To Reduce Your Retirement Taxes

By Mac McLean

April 9, 2021


Fun fact: There is no withholding on your retirement income. That’s why it’s important to start thinking about ways you can reduce your retirement tax burden now and avoid getting caught with an unexpected tax bill when your money is tight.

Here are five simple steps you can take to reduce your income taxes in retirement. If you need more help, sign up for one of our free online retirement planning events so you can learn more about these expenses and avoid any costly surprises.

  1. Understand your options – If you don’t know the difference between a traditional IRA and a Roth IRA, the rest of this article will mean nothing to you. And that’s O.K. Take a moment to review the basic types of investments (stocks, bonds, etc.) and how those investments are used in a retirement savings plan. The more you know before meeting a financial professional, the better off the both of you will be.
  2. Plan ahead – The best time to start saving for your retirement is today. It’s also a good time to think about how you can reduce your retirement tax burden. For instance, think about putting your money into a Roth IRA now – even if it’s just a little bit at a time — when you’re still working and can afford to pay the taxes on it. This strategy beats paying taxes on your income once you’ve retired and don’t have that much money to spare. 
  3. Manage your investments – Make sure you’ve diversified your investments before you retire and plan on following them closely once you stop working. And, don’t forget selling an underperforming stock that has been losing money at the same time you sell a stock that’s been earning money can reduce your capital gains and the capital gains tax you’ll have to pay.
  4. Know the brackets – What’s the difference between $80,250 and $80,251? A married couple who earns $80,250 this year will have to pay a 12 percent income tax rate, while a couple earning $80,251 will have to pay a 22 percent tax rate. Closely watching your income in retirement – especially if you’re on the cusp between one tax rate and another tax rate – is almost as important as watching your investments and the money you have saved. And making sure you have the tools you’ll need to do this job ahead of time, such as a Roth IRA you can draw money from to cover unplanned expenses, is one of the best ways to achieve this goal.
  5. Beware the RMD – Finally, make sure you understand whether your investments carry any rules or obligations that could upset your plans. Most retirement savings plans have a required minimum disbursement rule that forces you to withdraw a certain amount of money each year or face a stiff penalty. These withdrawals count as income that can easily scoot you into a higher tax bracket and will make you pay a higher income tax rate than you’d like to pay. The best way to avoid these surprises is to understand how these disbursements work and plan accordingly. 

Truthfully, there is no easy way to reduce your taxes in retirement. That’s why you should talk to a financial planner so you can set up a strategy now and update that strategy once you’ve retired. Sign up for one of our free online retirement planning events so you can start this process today.

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