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How to Lower Your Tax Bill in Retirement

How to Lower Your Tax Bill in Retirement

How far away are you from retirement? Are you getting closer to those so-called “golden years?” If you are then you hopefully you’ve already started preparing for your retirement with a sound plan. Retirement is supposed to be a glorious time in life. But unfortunately, for many, it turns into a nightmare because of a lack of preparation.

Retirees have a lot to consider. One of the biggest worries is often healthcare, for obvious reasons. Healthcare is expensive and it can get even worse when you don’t have a steady paycheck coming in. Having the right living conditions is also important and paying for housing can be a big stress in retirement.

Surprise! You Still Have to Pay Taxes

Another big problem retirees face is taxes. And one of the biggest reasons taxes in retirement is such a problem is that many retirees aren’t prepared for them. Many retirees think that because they’re no longer collecting a paycheck, they won’t really have to pay taxes when they retire. That couldn’t be further from the truth. The fact is retirees are still required to pay taxes on several sources of income, including pension income, withdrawals from retirement plans, and part-time work, for example.

The good news is you can take certain steps to help lower your tax bill in retirement. There are actually numerous options, but here are three common measures you can take to avoid paying as much to the IRS when you call it quits from the workplace.

Roth Retirement Plan

traditional IRAs and 401(k)sare a great way of reducing your tax bill while you’re still working. You also get the benefit of having that money when you do finally retire. The problem is, you still have to pay taxes when you start to withdraw it. On the other hand, Roth IRAs offer you a tax-free withdrawal option. With a Roth, you’ll have to pay tax on your income upfront. However, after that money is contributed to your IRA it grows tax-free. And you can then withdraw it later, also-tax free. This can lead to big tax savings in retirement.

Up for a Move

another option to save on taxes is to move somewhere else. Of course, this isn’t a desirable option for many retirees. However, if you don’t mind cutting ties then moving to a state that doesn’t tax Social Security will save you money for sure. However, be sure you look at all of the tax implications before you up and move. In any case, for Social Security benefits purposes only, avoid these states to lower your tax bill:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Try Municipal Bonds

another good way to lower your tax bill is to invest in municipal bonds. These bonds are similar to corporate bonds, but states, counties, and cities issue them. You agree to loan money for a certain period of time and collect interest payments until the due date to pay them back arrives. The good thing about municipal bonds is that the federal government does not tax those interest payments. And neither does your state or local agencies if your home state issues those bonds.

The post How to Lower Your Tax Bill in Retirement first appeared on Advisors to the Ultra-Affluent – Groco.


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