Posted by Debi G Hill, CPA

Want To Reduce Your Taxes In Retirement? Heres How!

Want To Reduce Your Taxes In Retirement? Heres How!

If your retirement is decades away or just around or you already have the dream, you can now do some simple things to reduce taxes.

Taxes In Retirement? Yes and yes Part of social security benefits may be taxed. Money withdrawn from the traditional IRA and 401(k) will be taxed. And investments in a standard brokerage account can face capital gains and dividend taxes.

The following ideas can save you a lot of time, making retirement years a little less stressful.

1. Enter Money Into A Roth IRA Account

Without a doubt, the easiest way to reduce your retirement account is to deposit money in a Roth IRA today. The rules apply, but follow everything you put in Roth, your contributions, as well as the money earned in this account, are tax-exempt at the time of retirement.

There are several means in opening a Roth:

  • You can contribute to an IRA Roth account if you meet the contribution requirement and income limits.
  • You can save to a Roth 401(k) if your employer offers one.
  • You can convert a traditional IRA into Roth through a Roth IRA backdoor.

There is a disadvantage (well, nothing is perfect): with a Roth IRA, the tax exemption comes later. Enter the money into your account after paying taxes. This is different from a traditional IRA or 401(k), which offers an anticipated tax holiday. You can think of Roth as the current pain for long term gains.

2. Open An HSA

This is only for people who have a high deductible health insurance plan. As long as the health plan obeys the rules of the IRS (among other regulations, the excess must be at least $1,350 for an individual plan and $2,700 for a family plan), you can open a savings account. Health is one of the best savings offers.

You can put the money before taxes, this money increases with the deferred taxes, and as long as you spend money for eligible health expenses, you will never pay taxes. HSA's annual contribution limit is $7,000 for a family plan and $3,500 for one person in 2019.

3. Pay Mortgage And Reduce Expenses

The less you need to withdraw retirement accounts requiring withdrawal fees, such as traditional IRA accounts and 401(k), the smaller the account.

Since a mortgage is one of the most significant bills you can withdraw, it makes sense to try to get rid of it. When you retire, you will probably pay the principal, not the interest. As a result, you will not receive many tax benefits through the deduction of mortgage interest.

Another idea: Consider relocating to a cheaper state. You may not be moving somewhere for taxes alone, but if you are planning to move, consider doing so. This can save you a lot of money. Some states have no income tax; some do not tax their retirement income.

4. Calculate Your Investment Sales

If your stock price is high and you want to sell, you can expect to sell these shares for up to a year when your total income and, therefore, your tax rate are lower.

"In lower tax years, it could be a good year to realize a capital gain on something you plan to sell." "The opposite is to realize losses on investments in what might otherwise be a year with higher incomes."

First, your losses offset capital gains, but net capital losses can offset up to $3,000 of income each year.

5. Consider Investing In Municipal Bonds

In general, municipal bonds are tax-free, which means you do not have to pay federal tax debt (or state taxes) for the income you receive. If this suits your overall investment projects, this extra tax-free income can be a good thing.

(However, there are disadvantages, for example, it is necessary to include the municipal income for social security taxation.)

6. Manages Retirement Withdrawals

If you have a 401(k) account and a Roth IRA or Roth 401 (k) account, one way to control your taxes is to manage your old age withdrawals.

In years when, for whatever reason, you fall into a low tax bracket, consider taking taxable money to cover your living expenses. In years when you are in a higher tax bracket, it is advisable to withdraw from the Roth IRA so that your income is not taxed at high rates.

Similarly, you can use years of low taxation to convert the traditional IRA into Roth. When you withdraw money from an IRA, it becomes taxable even when you convert that money into Roth. Therefore, it makes sense to do so in years where your income is low, and you convert, so that your income that year is not subject to a higher tax level. In this way, you pay a lower tax rate and receive all that money in an account where the money is tax-free.

7. Give Out From Your IRA

If you are at the age when you have to start withdrawing money from the traditional IRA, aka age 70½; consider giving your favorite charity directly from your traditional IRA.

This tax benefit avoids taxes of up to $100,000 per year. You may use this gift in whole or in part to count the required minimum distribution of the IRA. (But if you contribute to your IRA, you cannot even claim a deductible for the same amount).

Debi G Hill, CPA
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