6 Surprising Tips for Minimizing Retirement Taxes

As the saying goes, nothing’s certain but death and taxes. But, there is good news! Retirement taxes may not be as much of a burden as you may think. In fact, the peak of your tax-paying years is around age 50, when about 80% of American households pay federal income taxes. At age 65, that level drops to about 50%, according to a study from the Boston College Retirement Center for Retirement Research.

retirement taxes Kick back and enjoy life by minimizing retirement taxes!

Retirees often experience lower taxes in retirement because they typically make less money than they did during their working years. Even though taxes decrease the closer you get to retirement, there are still some best practices to try and stick to when navigating through retirement.

Here are 6 tips for minimizing retirement taxes:

1. Stay Flexible

At this point in your life, you will most likely have several different account types, which may include a brokerage account, a traditional tax-deferred account like an Independent Retirement Account (IRA) or a 401(k) and a Roth IRA in which you can withdraw tax-free, explains Pamela Kornblatt, president of Tax Strategist, LTD, based in New York City.

“Conventional wisdom holds that you should start by drawing on the taxable assets and then move next to the tax deferred vehicles, saving the Roth, which is tax-free, for last,” Kornblatt says. “However it may not necessarily be advantageous to strictly follow this order, and it is in fact ideal to keep assets in each type of account to be able to tap into them throughout your lifetime.”

It’s a good idea to make sure you maintain assets in each of the three types of accounts, Kornblatt explains. “This allows for added flexibility to both help lower your overall tax burden and also spread taxes out over time so you don’t have to pay them all out at once,” she says.

2. Consult an Expert

The process of trying to figure out where to take funds out of to minimize the impact of taxes is pretty complicated, especially when you throw in Social Security taxes and income from other sources, in some situations. You might need an expert on the topic, Kornblatt points out.

“Every person has a unique tax situation and an advisor can customize an approach to ensure you have enough money to live on in as tax efficient a way as possible,” she says.

3. Evaluate Where You Live — The Best States for Retirement Taxes

Another tip that can have a huge impact on your taxes in retirement is thinking seriously about where you live. It is not just a coincidence that a lot of people in the U.S. move to Florida when they retire.

“Florida has fantastic weather but it also has no income tax at the state level,” says Kornblatt. “Moving to a state with no state income tax can have a significant effect on your overall tax burden.”

There are actually six other states in the U.S. that currently don’t have income taxes on the state level: Alaska, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee are also two states where residents don’t have to pay tax on dividends and income from investments, which can help save you money in retirement.

4. Minimize Expenses

The less you spend in retirement, the less income you need and — therefore – the less taxes you will pay.

It may be important for you to keep below certain income thresholds.

The IRS says that, for 2016, the tax rates for households married filing jointly are:

  • 10% for taxable income of $0-$18,550
  • 15% for taxable income of $18,551-$73,300
  • 25% for taxable income of $73,301-$151,900
  • Up to 39.6% for taxable income of $466,951 or more

The new tax rates for married households filing jointly in 2018 are:

  • 10% for taxable income of $0-$19,050
  • 12% for taxable income of $19,051-$77,400
  • 22% for taxable income of $77,401-$165,001
  • 24% for taxable income of $165,001-$315,000
  • 32% for taxable income of $315,001-$400,000
  • 35% for taxable income of $400,001-$600,000
  • 37% for taxable income of $600,000 or more

Learn more about why taxes in retirement matter.

5. Pay Attention to Required Minimum Distributions

Sometimes your income will be determined not by how much you spend, but rather by how much you are required to withdraw from taxable retirement accounts.

By law, you are required to withdraw funds from your retirement account each year after you reach age 70½ (or the year in which you retire if you retire after that age). That amount is referred to as a required minimum distribution (RMD).

6. Consider Your Overall Retirement Plan

Minimizing how much you spend on taxes is only one aspect of your retirement financial plan.  Taxes are annoying, but it is important for you to evaluate all aspects of your saving, spending and earning.

Consider using a retirement calculator that helps you plan for all aspects of your retirement.  Figure out what you want to spend for retirement happiness, how those expenses will change overtime and then find the best retirement strategies for making your dreams come true.

See just how much (or little) taxes burden your retirement.

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