Worrying about taxes doesn’t end once you’re in retirement. Navigating tax time can be just as tricky in your retirement years as when you were working. If you’re looking for proven ways to reduce your tax liability in retirement, these seven tips are a good place to start.
- Make Withdrawals Strategically
In retirement, you often have income coming from many different savings accounts. Some of those accounts will be tax-deferred, and it may be in your best interest to delay withdrawals from those accounts as long as possible, limiting your taxable income each year. So, if you have a taxable account such as a ROTH IRA and a tax-deferred account such as a 401K, you’ll want to defer making withdrawals from the 401k for as long as possible to keep you from moving into a higher tax bracket and having a higher tax bill.
- Max Out Your Tax Bracket
If you haven’t maxed out your current tax bracket at the end of the year, consider withdrawing income from tax-deferred accounts to reduce your future taxable income. For example, if you have a large IRA and still have some wiggle room before you max out your current tax bracket, consider withdrawing funds from that IRA in the current year. You will be taxed on the money you withdraw, but only at your current tax rate. Each year, you can reduce the amount of your IRA and the less money you have to pay in taxes in the future.
- Reduce Expenses
Sometimes, paying less in taxes in retirement simply means reducing your current expenses. The less money you have to put out each month, is less money you have to withdraw from your retirement accounts. Talk with your CPA or accountant to see what type of tax hit you might take if you paid off significant expenses such as your car loan, a mortgage (if you still have one), and other bills that aren’t part of monthly living expenses. Taking one big tax hit to eliminate those bills means a much lower tax liability in the future as you will need far less money to live on month-to-month.
- Combine Income and Deductions
Try pulling some deductions into the current tax year to help minimize your overall tax liability. An example would be paying as many real estate taxes as you can in the current year, such as paying a January tax bill in December, allowing you to itemize your taxes. With those extra deductions, you can increase your income for the year without increasing your tax bracket and paying a higher tax rate. (FYI: The ‘Tax Cuts and Jobs Act’ passed at the end of 2017 makes many of these strategies less attractive as the standard deduction was doubled, causing many to lose the benefit of itemizing deductions, so be sure to discuss the impact with your CPA).
- Minimize Taxes on Social Security Benefits
Your Social Security benefits are taxed based on your combined income. If you file jointly and your combined income is below $32,000, you won’t have to pay taxes on your Social Security benefits. If you’re single and your income is below $25,000, you won’t have to pay taxes on your Social Security benefits, either. However, as your taxable income increases, you will have to pay more taxes on your Social Security benefits.
- Consider Moving to a Roth IRA
While this strategy won’t work for everyone, if you have a large IRA, consider moving some of it to a Roth IRA to help reduce future tax liability. The move can also help minimize your future required minimum IRA distributions (RMDs). To see if this strategy will work for you, mock up a tax return in the fourth quarter and see how much money you can remove before pushing yourself into a higher tax bracket.
- Try a Reverse Mortgage
Having payments from a reverse mortgage can help you reduce your tax bill by lowering your IRA distributions. A reverse mortgage may also push back the need to start taking those IRA distributions, or RMDs, before the age 72 deadline when distributions become mandatory. You can get the reverse mortgage payments for the rest of your life, and in the end, the bank is repaid when the home is sold.
Do you have questions about this content or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation to see if these strategies can improve your tax situation.
Note: This content was updated January 2025.
