9 Ways to Minimize Taxes in Retirement
Retirement is an exciting milestone. After decades of building your career and saving/investing, you finally have more time to relax, travel, and enjoy activities you love. However, tax obligations don’t end when your career does. To make the most of your hard-earned wealth, it’s essential to minimize taxes and protect what you’ve built.
The good news is there are a number of strategies that can lower your tax bill and help you preserve more of your hard earned money as a retiree. Here are some of the most effective methods for minimizing taxes in retirement, ensuring that your hard-earned assets continue to work for you.
1. Choose a Roth IRA or Roth 401(k)
Roth accounts, such as a Roth IRA and Roth 401(k), are powerful tax deferral tools. With a Roth account, you’ll owe taxes when you put the funds in. Then, your account will grow tax-free, and you’ll be able to withdraw funds without paying taxes during retirement.
If you’re comfortable taking on a higher tax burden during your earning years, this strategy can lead to substantial long-term tax savings and greater wealth preservation in retirement. Keep in mind that if you’ve already stored your cash in pre-tax retirement accounts like a Traditional 401(k) or IRA, for example, you can convert them to Roth accounts systematically over time and avoid tax increases in the future.
2. Take Advantage of Health Savings Accounts (HSAs)
As you age, your medical expenses are likely to go up. To ensure you receive the care you need to lead a happy, healthy life in retirement while simultaneously saving on taxes, leverage an HSA. Every contribution you make will be tax-deductible, and withdrawals for qualifying medical expenses in retirement will be tax-free. These withdrawals may be used for deductibles, copays, certain prescription medications, and more.
3. Leverage Tax-efficient Investments
If you’re looking to lower taxes in retirement, you’ll definitely want to consider investing in some tax-efficient investments like municipal bonds, tax-exempt mutual funds, and equities, which pay qualified dividends, to name a few. These are types of investments that have lower tax exposure compared to other accounts. For example, municipal bonds aren’t taxed by the federal government (though they might be taxed at the state or local level, or in certain situations). Another example is qualified dividends, which are taxed at a lower rate than regular income and ordinary dividends.
4. Invest in Real Estate
To diversify your income streams in retirement and lower your tax bill at the same time, consider investing in an additional piece of estate. You can offset the income you generate with depreciation and pass down your properties tax-free, allowing them to avoid capital gains taxes that are typically charged for appreciation. If you don’t want to commit to physical real estate, real estate investment trusts (REITs) might be a better alternative and offer an additional 20% pass-through income deduction.
5. Plan for Required Minimum Distributions (RMDs)
Generally speaking, upon reaching age 73, you’ll be required to withdraw funds from your IRA and 401(k) accounts. When you do so, you’ll owe taxes. If you decide not to pull money at these ages, you’ll be responsible for a penalty of up to 25% of the amount that should’ve been distributed to you as well as taxes. To keep your tax bill in check and avoid unnecessary penalties, stay on top of RMDs in retirement.
6. Be Mindful of Social Security
In most cases, you’ll have to pay taxes on anywhere from 50 to 85 percent of your Social Security income. By delaying Social Security until age 70 (if possible) and not taking it early at age 62 when you’re entitled to it, for example, you may enjoy some tax savings. Note that the more you receive in Social Security, the less you’ll have to withdraw from other taxable sources. This approach can help you reduce your tax bill as well.
7. Move to a Tax-Friendly State
Your location will play a role in how much taxes you owe. If you’re flexible and open to a new environment, you might want to retire in a tax-friendly state. There are seven states that have no income taxes, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
Per federal law, you won’t have to pay taxes on your retirement accounts if you live in one of these states, even if you earned your retirement benefits elsewhere. If none of these seven states appeal to you, Illinois, Mississippi, or Pennsylvania might also be good options, as these states offer breaks on retirement plan distributions and pensions.
8. Give Back
Not only can charitable giving make you feel warm and cozy inside, it’s a powerful tool for lowering your tax bill. With donor-advised funds (DAFs), for example, you’ll be able to contribute to eligible charitable funds, secure an immediate tax deduction, and recommend grants. Another option is a qualified charitable distribution (QCD), which will allow you to donate up to $105,000 per year directly from your IRA to a qualifying charity as long as you’re 70.5 or older. Since QCDs are not part of your tax income, they can help you save on taxes.
9. Consult with a Financial Advisor
Taxes can be complicated, especially when you retire. For professional guidance and recommendations on the best ways to minimize taxes for your particular situation, reach out to an experienced financial advisor.
While Olympic Wealth Management does not provide formal tax advice, the firm does have considerable expertise in working with high-net-worth investors who are planning for retirement and facing decisions which may impact their tax exposure. Firm principal Eric Cumley, CFP can help you design a tax-efficient investment plan for your retirement years, empowering you to preserve your wealth and maximize your financial well-being.
Minimize Your Retirement Taxes With Olympic Wealth Management
Retirement is a time to enjoy life without the burden of excessive taxes. After all, you didn’t build your wealth only to give away more of it than necessary. It’s your hard-earned money — you deserve to keep as much of it as possible.
By leveraging Roth accounts, HSAs, tax-efficient investments, charitable funds, and other investment strategies, you can minimize your tax liability and maximize your financial resources.
To get started planning for a tax-efficient retirement, schedule your complimentary consultation with us today.
- Introduction
- Choose a Roth IRA or Roth 401(k)
- Take Advantage of Health Savings Accounts (HSAs)
- Leverage Tax-efficient Investments
- Invest in Real Estate
- Plan for Required Minimum Distributions (RMDs)
- Be Mindful of Social Security
- Move to a Tax-Friendly State
- Give Back
- Consult with a Financial Advisor
- Contact Us