Retirement taxes can significantly cut into your income, leaving you with less to live on. You can minimize these taxes during the golden years (between 65 and 75 years old), when you're in the lowest tax bracket.
In this article, you’ll discover how to achieve this objective during this period.
Why You Should Reduce Your Retirement Income
As long as you have taxable income, you will incur taxes. Some taxes you could be charged include federal income tax, state income tax (where applicable), and capital gains tax.
Capital gains tax may be charged if you withdraw funds from an investment account.
Whatever kind of tax you get charged, it’ll be higher if you have a higher taxable income.
This could significantly reduce your assets and exhaust them during your retirement.
You can minimize your taxes when you are between 65 and 73 years old, have not started social security benefits, and are not taking retirement account income. This is an opportune period to do this because you may be in the lowest tax bracket.
Strategies to Reduce Your Retirement Taxes
Here’s how to reduce your retirement income between 65 and 73 years old to incur reduced retirement taxes:
● Sell assets invested for the long term for living expenses: Assets invested for the long term are taxed at the favorable long-term capital gains tax (CGT). Selling these assets attracts a lower CGT, allowing your funds to last longer.
● Delay taking social security benefits: Not only will this reduce your retirement income, but you can also maximize your social security benefits. Each month you delay taking your social security benefits, the Social Security Administration increases them by ⅔% after you’ve reached your full retirement age.
● Move funds from your qualified employer-sponsored retirement plans to Roth accounts: For example, you can convert a traditional IRA into a Roth IRA or a 401(k) into a Roth 401(k). Income from Roth accounts is tax-free and is not subject to required minimum distributions (RMDs) while you’re alive. While you will be taxed on the amount you convert, the rate will be lower because you will be in a lower tax bracket. Remember to move the funds to Roth accounts at least five years before you’ll need them.
● Let tax-deferred retirement accounts continue to grow: Keep investing in tax-deferred accounts such as the traditional IRA or 401(k). Let this continue until just before you reach the age of mandatory RMDs (currently 73).
Conclusion
Ideally, tap taxable accounts first, followed by withdrawing from tax-deferred accounts, and finally tax-free accounts. However, your individual circumstances will dictate the optimum withdrawal sequence to follow. Review your financial plan to ensure that you've optimized your retirement taxes.
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