10 Brilliant Ways to Cut Your Retirement Taxes and Save Money

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Many people assume health care will be their biggest expense in retirement, but they often overlook income taxes.  Lowering your taxes after retiring can actually decrease the amount you need to save for retirement in your state. Here are 10 smart strategies to cut your taxes in retirement.

Consider Roth Accounts

Roth IRAs and 401(k)s are your best friends when it comes to tax planning for retirement. Unlike traditional retirement accounts, Roths offer tax-free withdrawals, which can be a game-changer for managing your tax liabilities in retirement. 

Whether you’re still working or considering a Roth conversion, the tax-free nature of these accounts is worth your attention.

Harvest Capital Losses

When your income transitions from salary to capital gains, you gain more flexibility in deciding when to report income and losses on your taxes. This led to a strategy called tax-loss harvesting, where you sell underperforming investments in high-income years to offset income and reduce your tax obligation. 

However, IRS rules limit how you can implement this strategy, so consulting with a financial planner or accountant is advisable.

Pick Your Retirement State with Care

The location of your retirement home can significantly impact your tax situation. Some states roll out the red carpet for retirees with no income tax, while others, like California, could take a sizeable bite from your retirement funds. 

Exploring tax-friendly states could lead to substantial savings, so choose wisely.

Time Your Withdrawals

Strategic withdrawal from tax-deferred accounts during lower-income years can optimize your tax situation. Withdrawing larger amounts when your income is reduced can lower your overall tax rate, saving you money in the long run.

Convert to a Health Savings Account

If you’re eligible, transferring funds from a traditional IRA to a Health Savings Account (HSA) can be a savvy move. HSAs offer a triple tax advantage, with tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

It’s a once-in-a-lifetime opportunity that could significantly reduce your tax burden.

Direct RMDs to Charity

For those aged 70.5 or older, directing Required Minimum Distributions (RMDs) from your IRA to charity reduces your taxable income. This method allows for tax-free charitable contributions up to $100,000, directly lowering your tax burden. 

This donation isn’t counted as part of your taxable income for the year, potentially reducing how much of your Social Security benefits get taxed.

Reduce Your Expenses

Lowering your overall living expenses can indirectly reduce your tax liability by decreasing the amount you need to withdraw from taxable accounts. This strategy results in more money in your pocket and a reduction in taxable income, thereby lowering your tax obligations. 

It’s also smart to make sure your retirement savings are with brokers that don’t overcharge you with fees.

Consider Tax-Free Investment Options

A drawback of relying solely on Social Security, pensions, and retirement account withdrawals for retirement income is that it’s all taxed as ordinary income. However, profits from selling investments like stocks, bonds, and real estate fall under capital gains, which enjoy more favorable tax rates. 

With capital gains tax, there are only three brackets, and impressively, one of these is zero—meaning potentially no taxes on gains. 

Leverage Roth Withdrawals

Roth retirement accounts, like Roth IRAs and Roth 401(k)s, allow you to make qualified withdrawals in retirement tax-free. This means you can pull more from your Roth accounts in years when your taxable income is already high, without increasing it further.

For instance, if you’re downsizing and selling your home with a substantial capital gain, drawing from your Roth instead of traditional retirement plans could reduce your tax bill.

“Bunch” Your Deductions

If your itemized deductions are close to the standard deduction amount, you could lower your tax bill by “bunching” your deductions into one year. Normally, you deduct expenses in the year you pay them. 

Grouping deductible expenses into one year lets you itemize deductions that year and take the standard deduction the next, when you have fewer deductible expenses.

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