20 Retirement Tax Strategies Nobody Tells You About
By learning about these proficient tax strategies, you can spare yourself from tax headaches in retirement.
- Cyra Sanchez
- 6 min read
Retirement sounds sweet until you remember you still have to worry about your taxes. That’s why you should simply prepare as early as possible to relax when you’re older. Discover these 20 helpful retirement tax strategies that no one else might tell you about.
1. Beware of Net Investment Income Tax
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Net Investment Income Tax (NIIT) gives you an extra 3.8% tax on your net investment income. This means it affects your income from capital gains, property and royalty income, interests, dividends, and non-qualified annuities. You must avoid hitting the threshold by dividing over the years to prevent this.
2. Consider moving to a tax friendly state
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If it suits your retirement plan, you can also consider moving to another state. States that won’t tax your income are Texas, Alaska, South Dakota, Tennessee, Nevada, Florida, Wyoming, and Washington. However, tax laws change frequently, so before you move, plan strategically by constantly staying updated with state law changes.
3. Roth conversions
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A Roth conversion means converting some or all of your funds from a traditional IRA to a Roth IRA. With this, you only have to pay the usual income taxes for the amount you converted within the year. There may be additional taxes, but this Roth conversion benefits a tax-deferred portfolio.
4. Manage your Social Security taxes
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Consider waiting before you claim your Social Security benefits to lower your taxes during early retirement. In exchange, you can avoid having up to 85% of your retirement benefits from becoming taxable. This will help you save a lot from taxes overall.
5. Strategic account withdrawals
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Whenever you withdraw, you must consider the taxes that come with it. It would be best to withdraw from taxable accounts first because of their capital gains rates, making them lower than regular income taxes. You must also be patient before withdrawing from tax-free accounts like Roth IRAs to enjoy the benefits of their tax-free growth.
6. Tax-efficient investments
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Your investments will significantly affect your retirement taxes, so you must plan them wisely. Consider investments with lower turnover rates, such as index funds or ETFs.
7. Plan your required minimum distributions
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Since required minimum distributions (RMD) can’t be avoided, you must plan for it in advance; failing to make the mandatory withdrawals will lead to a 25% tax penalty for the amount you could not withdraw. This creates an increased taxable income, which may also affect your Social Security benefits taxes. It would be best if you began making withdrawals earlier than the required timeframe to prevent this.
8. Work with a financial advisor
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Being an expert in finances and taxes isn’t easy, especially when you already have to make many plans for your future. Working with a financial advisor is also an option to lessen your burden. With a professional, they can come up with an ideal retirement plan that can help you manage your taxes in your best interests.
9. Take advantage of health savings account
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Health Savings Accounts (HSA) aren’t exclusively for retirement, but they could still benefit those planning to retire soon. Contributions to your HSA help reduce taxable income and yearly limits, making some of your investments tax-free. Additionally, withdrawing money for medical expenses won’t be taxed through your HSA.
10. Consider a Spousal IRA
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Depending on your country and state’s tax laws, you may be eligible for a Spousal IRA. If you both earn $50,000 annually, you can contribute to your spouse’s IRA to lessen the contributions they have to make. In exchange, your taxable income will become lower within that year, and you can claim the amount in your tax return.
11. Tax deduction credits
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While paying taxes during retirement, you can take advantage of tax deductions or tax credits. Consult the IRS once you turn 65 regarding deductions to find out the options that are perfect for you. With this, your tax can grow significantly smaller.
12. CGT Retirement exemption
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If you own a small business or assets you plan to sell soon, you might qualify for a CGT Retirement Exemption. This means none of your sales will be taxed, and you can keep your income. The threshold is $500,000, and there are rules or requirements to meet before you qualify.
13. Know your tax bracket
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The general rule of the tax bracket is that the more income you make and report to the IRS, the higher your tax bracket will be. Reducing the amount you withdraw from your taxable accounts is advisable to lessen your taxes.
14. Beware of early withdrawal penalties
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Withdrawing from your IRA and 401(k) before age 55-59 gives you a 10% tax penalty. There are many ways to avoid this penalty, but only if the amount withdrawn was used for specific reasons like an IRA distribution for college fees, healthcare costs, health insurance after losing a job, or buying a house for the first time.
15. Contribute to a Roth 401(K)
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Contributing to tax-deferred accounts like a Roth 401(k) lowers your taxable income in the same year. These contributions won’t be taxed until retirement, and your withdrawals only need to pay ordinary income tax rates.
16. Strategic investments
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Lower your financial risks after retirement by choosing the right investment plans. Consider moving a portion of your retirement assets to treasury bonds; they’re typically not taxable by the state. You can also consider municipal bonds, which aren’t taxed federally.
17. Contribute to an IRA
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Contributing to a 401(k) IRA is a common strategy for retirees. It helps you reduce income tax from your retirement savings. Depending on your contributions, you may also benefit from an immediate tax break if less money is being withheld by your income taxes.
18. Time your retirement strategically
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The best time of the year to retire is near the end or the beginning of a new year. This helps you spread out your withdrawals throughout the year, lessening the tax you’d have to pay.
19. Take advantage of permanent life insurances
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Another wise investment you can make is paying for permanent life insurance. This is tax-free; you can withdraw cash from your contract without paying taxes. The death benefit your heir inherits will also be tax-free, so they can take advantage of all the money you left behind.
20. Control your income through Pretax Retirement Plans
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One way to effectively lessen your tax during retirement is by taking advantage of Pretax Retirement Plans. With these, you can evenly spread out your income, controlling your finances without hitting the threshold that may move you to a higher tax bracket.