Ways to Pay Less Taxes in Retirement: Top Tax-Saving Strategies for Retirees

Retirement is a time to enjoy the fruits of your labor, but high taxes can drain your hard-earned savings. Fortunately, with the right tax-saving strategies in retirement, you can reduce your tax burden and maximize your income. In this guide, we’ll explore practical ways to save on taxes in retirement to keep more of your money.

1. Diversify Your Income Streams for Tax Efficiency in Retirement

One of the best ways to save on taxes in retirement is by diversifying your income streams. This approach allows you to have a mix of taxable, tax-deferred, and tax-free income sources, giving you flexibility to minimize taxes.

• Taxable accounts: Income from these accounts, such as brokerage or savings accounts, is taxed annually. These accounts can provide liquidity without triggering large tax events.
• Tax-deferred accounts: Accounts like traditional 401(k)s and IRAs defer taxes until withdrawals. You can manage withdrawals to take advantage of lower tax brackets.
• Tax-free accounts: Roth IRAs and municipal bonds generate tax-free income. Roth IRA withdrawals are tax-free, while municipal bonds offer tax-free interest at the federal level (and often state level).

By strategically tapping into these accounts in retirement, you can reduce your taxable income. This approach is especially effective if you’re nearing a higher tax bracket or want to maintain a lower tax burden.

2. Consider a Roth IRA Conversion to Reduce Future Taxes

A Roth IRA conversion can provide long-term tax savings. This strategy involves converting money from a traditional IRA or 401(k) to a Roth IRA. While you pay taxes on the converted amount upfront, future withdrawals are tax-free.

Here’s why a Roth conversion could be a key part of your retirement tax planning:

• If you expect to be in a higher tax bracket in retirement.
• During low-income years, such as the early years of retirement, when you can take advantage of lower tax rates.
• To reduce required minimum distributions (RMDs) from tax-deferred accounts, which can otherwise push you into a higher tax bracket.

3. Manage Required Minimum Distributions (RMDs) Strategically

Required Minimum Distributions (RMDs) start at age 73 for traditional 401(k) and IRA accounts, and these withdrawals are taxed as ordinary income. Failing to take your RMD can result in steep penalties.

To minimize the tax impact of RMDs:

• Begin withdrawals early: Start drawing down your tax-deferred accounts before RMDs are required, especially if you are in a lower tax bracket.
• Convert to Roth IRAs: Roth IRAs don’t have RMDs, so a Roth conversion can help you avoid mandatory withdrawals.
• Use Qualified Charitable Distributions (QCDs): Donating part of your RMD to a charity can help you meet the requirement without increasing your taxable income.

Managing your RMDs can be an effective way to reduce your taxable income in retirement.

4. Relocate to a Tax-Friendly State

One often-overlooked way to save on taxes in retirement is relocating to a state with lower or no income tax. States like Florida, Texas, and Nevada offer tax-free retirement income, which can help stretch your retirement savings further.

Before making the move, consider:

• State income taxes: Some states don’t tax Social Security benefits or withdrawals from IRAs and 401(k)s.
• Property taxes: High property taxes can offset savings from no state income tax.
• Sales taxes: Some states compensate for no income tax with higher sales taxes.

Carefully evaluate all tax factors to ensure that moving makes financial sense.

5. Take Advantage of Tax Credits and Deductions for Retirees

Several tax credits and deductions can help retirees lower their tax bill:

• Credit for the Elderly or Disabled: This credit is available to low-income seniors over 65 or those who are retired due to disability.
• Medical expense deductions: You can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI), which can be particularly helpful if you face high healthcare costs in retirement.
• Higher standard deduction for seniors: If you’re 65 or older, you qualify for a higher standard deduction, which can reduce your taxable income.

Utilizing these credits and deductions can significantly reduce your tax liability in retirement.

6. Time Your Withdrawals to Minimize Taxes

Strategic timing of your retirement account withdrawals can be a game-changer in reducing taxes. Here’s how you can do it:

• Withdraw during low-income years: Early retirees who haven’t yet started receiving Social Security or pensions can withdraw from tax-deferred accounts to stay in lower tax brackets.
• Stay within your tax bracket: Calculate how much you can withdraw without bumping into a higher tax bracket.
• Capitalize on 0% capital gains rates: For retirees in the lower tax brackets, long-term capital gains may be taxed at 0%, which means you could sell appreciated assets tax-free.

By carefully timing withdrawals, you can avoid unnecessary tax hits in retirement.

7. Delay Social Security Benefits for Bigger, Tax-Efficient Payouts

Delaying Social Security until age 70 can lead to higher monthly benefits, which provides an effective way to boost retirement income without a significant tax burden. Social Security benefits are only partially taxable, and by delaying, you maximize your lifetime benefits and potentially reduce taxable income.

8. Tax-Efficient Investment Strategies for Retirees

Tax-efficient investing can help retirees reduce their tax bills while keeping investments growing. Some options include:

• Municipal bonds: Interest from municipal bonds is often exempt from federal (and sometimes state) taxes.
• Tax-managed funds: These funds minimize taxable distributions by using strategies such as holding investments for long periods or offsetting gains with losses.
• Sell taxable investments first: To preserve the tax-deferred growth of retirement accounts, consider selling from taxable investment accounts first.

Tax-efficient investments can lower your taxable income, keeping more of your money in your portfolio.

9. Plan Your Estate to Minimize Taxes on Heirs

Effective estate planning can also help reduce taxes for your beneficiaries. Here are a few key strategies:

• Annual gifting: You can give up to $18,000 per person per year (as of 2024) without triggering gift taxes. This reduces the size of your estate and lowers potential estate taxes.
• Trusts: Set up trusts, such as a revocable living trust or irrevocable life insurance trust (ILIT), to manage your estate and minimize tax exposure for your heirs.

Proper estate planning ensures that your legacy is protected and that your heirs aren’t burdened with excessive taxes.

10. Stay Updated on Changing Tax Laws

Tax laws are constantly evolving, and staying informed can help you take advantage of new opportunities to save on taxes in retirement. Changes to Social Security, retirement contribution limits, or new tax credits can affect your strategy, so keep an eye on updates to optimize your tax planning.

Final Thoughts on Saving Taxes in Retirement

With the right tax-saving strategies in retirement, you can significantly reduce your tax burden and enjoy a more comfortable retirement. Diversifying your income streams, managing RMDs, converting to a Roth IRA, and relocating to tax-friendly states are just a few ways to save on taxes

One of our advisors would be happy to tailor these strategies to your unique situation and stay up to date with tax law changes.