Top Ways to Cut Taxes in Retirement

Could This Year’s Tax Refund Be Bigger Than Last Year’s?

By Alan Olsen

When you think of retirement you tend to think of pleasant things. Perhaps you dream about living out your days on a sunny beach or sailing around the world in your luxurious yacht. Maybe you plan to travel the world or maybe you just want to relax and enjoy more time with your family. Whatever the case, retirement is supposed to be enjoyable. And certainly no one wants to think about taxes in retirement. Why spoil a good time with such a depressing subject?

Don’t Let Taxes Spoil a Good Retirement

But unfortunately, taxes have a way of messing up retirement for some people. But that’s usually because they don’t take the time to prepare before they actually retire. No one ever likes being bothered by the taxman, but it can much worse in retirement. After all, you can’t really enjoy your golden years if you don’t have enough money to do the things you love. If you’re currently working, then fortunately, you still have time to prepare. And there are several steps you can take to help you cut taxes in retirement.

Have You Thought About a Roth?

One of the easiest and quickest ways to save in retirement is converting your traditional IRA to a Roth IRA. Long before you have to start withdrawing your required minimum distributions (RMDs) from your traditional retirement accounts you should consider converting to a Roth. You don’t even have to do it all at once. You can convert small portions multiple times. You will have to pay taxes on the money, but then it will grow tax-free after that. This could save you big time in retirement. The best time to do this is when your income is lower so your tax bracket is lower.

Donate to Charitable Causes

Donating to charity is another way to lower your tax bill in retirement. Instead of keeping the money from your RMDs from your traditional account you can donate it to charity. That means you avoid the tax penalty for that money. With a qualified charitable distribution, you can actually donate up to $100,000 of your annual RMD tax-free.

Don’t Forget Your Capital Gains

Selling long-term stocks when your income is lower makes good business sense. The lower your income, the lower capital gains tax rate you’ll pay. Of course, you shouldn’t sell a stock simply to get a tax break. But if selling makes sense and you’re in the right position to do it, then offload those stocks when your income is on the lower end.

Should You Delay Social Security Benefits?

One other way to lower your taxes in retirement is to delay collecting Social Security benefits until you turn 70. Not every one can do this, but if you don’t need those benefits right away there are advantages to waiting. If your income level is still higher, your tax bill for Social Security benefits would likely by higher, too. Furthermore, the size of your monthly Social Security benefits will likely increase if you wait till you’re 70.

Ask a Pro

As with any important tax decisions, it’s always a good idea to check with a tax professional before moving forward. Contact GROCO for help with your retirement planning.