Posted by Fletcher Accounting and Tax Service Inc.

Retirement Savings Moves to Ease Your Tax Bill

Retirement Savings Moves to Ease Your Tax Bill

Although you will continue to pay taxes in retirement, a good tax retirement strategy can help you limit your tax burden in retirement. With that in mind, here are three retirement savings moves to ease your tax bill.

Open A Tax-Deferred Savings Account

A tax-deferred account is essentially any retirement savings account with a tax-deferred status. In other words, a tax-deferred savings account would allow you to claim an immediate tax deduction on the full amount you contribute to the account. 

Examples of tax-deferred accounts include traditional IRAs and employer-sponsored retirement plans such as 401(k) plans. You can use such an account to hold virtually any asset/investing including bonds, mutual funds, stocks, variable annuities, certificates of deposit and fixed annuities. 

The investment and interest inside a tax-deferred account typically grows tax-free until you take withdrawals. This means that a portion of the money in your tax-deferred account belongs to the IRS. To get tax from tax-deferred accounts, the IRS requires the holders of such accounts to start taking money out of their accounts when they reach age 70.5. These mandatory withdrawals are called the required minimum distributions (RMDs). In general, you should open a tax-deferred retirement account if you are a low-income earner or expect to move to a lower tax bracket in retirement. 

On the other hand, you should not open a tax-deferred account if you are an investor or expect to move to a higher tax bracket in retirement.

Home Sale Gain Exclusion (Code 121)

Under the Internal Revenue Code 121, you can exclude a certain amount of money in capital gains when you sell your primary residence. More specifically, you can exclude $250,000 if you are single and $500,000 if you're married. However, to qualify for this exclusion, you must have owned and occupied your primary residence for at least two out of the last five years. 

Moreover, you can claim this exclusion only once every two years. This strategy would work particularly well if you own real estate investments, multiple homes, or a big home and want to downsize for retirement. It is important to note that, to convert your rental to your residence, you would need to prorate your rental use. For this reason, you may not necessarily get your full exclusion amount

Open a Roth IRA Account

Named after the late William Roth, the Roth IRA is basically a type of tax-exempt account retirement account that you fund with your after-tax dollars, allowing your retirement savings to grow tax-free. This means that, as long as you adhere to the rules of the Roth IRA, the withdrawals and distributions from your Roth IRA account would not attract taxes. For this reason, a Roth IRA is better than a tax-exempt account. 

A Roth IRA is particularly ideal for people who expect to earn more money and move to a higher tax bracket in retirement, young workers who want to benefit from years of tax-free compound interest, anyone who wants to lower his/her retirement taxes, as well as people who do not want their heirs to incur inheritance tax.


Use the three strategies discussed above to lower your retirement tax burden.

Fletcher Accounting and Tax Service Inc.
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