How to Lower Your Tax Bill During Retirement

by | Jun 13, 2023

As you approach retirement, it is important to consider strategies for minimizing your tax bill. There are a variety of tax deductions and credits available for retirees, and taking advantage of them can help you stretch your retirement savings further. Here are some strategies you may consider implementing to minimize your tax burden as a retiree.

Maximize Contributions to Retirement Accounts

One of the easiest ways to reduce your tax bill in retirement is to contribute to retirement accounts such as 401(k)s and IRAs, where possible. Contributions to these accounts are tax-deductible, which means they can reduce your taxable income. Additionally, earnings on these accounts grow tax-free until you withdraw the money in retirement. By maxing out your contributions, you can both reduce your current tax bill and grow your retirement savings tax-free.

Consider a Roth Conversion

If you have a traditional IRA or 401(k), you may consider converting some or all of your funds to a Roth IRA. While the converted funds trigger a taxable event in the year of the conversion, once the money is in a Roth IRA, it will grow tax-free, and you will not have to pay taxes on withdrawals in retirement. This can be a particularly effective strategy if you expect to be in a higher tax bracket in retirement than you are currently.

Take Advantage of Medical Expense Deductions

Retirees are often faced with significant medical expenses. If you itemize deductions, these qualified medical expenses may be tax-deductible if they exceed a certain threshold. For the 2022 tax year, you may be eligible to deduct medical expenses that exceed 7.5% of your adjusted gross income. If you have significant medical expenses, be sure to keep track of them and consult your tax advisor to see if you may take advantage of this deduction.

Take Advantage of Charitable Contributions

If you make charitable contributions, you may be able to reduce your tax bill. Generally, charitable contributions are tax-deductible if you itemize your deductions, so if you donate to a qualifying charity, you may be able to deduct the amount of your donation from your taxable income. Additionally, if you are over 70 ½ and have a traditional IRA, you can make a qualified charitable distribution (QCD) from your IRA directly to a charity. At age 73, these contributions count towards satisfying your required minimum distribution (RMD) and allow you to avoid paying taxes on the distribution.

Consider Relocating to a Tax-Friendly State

Finally, if you are considering relocating in retirement, you may want to consider moving to a tax-friendly state. Some states have lower income tax rates or no income tax at all, which can help you reduce your tax bill in retirement. Additionally, some states have lower property tax rates, which can be particularly beneficial if you are a homeowner.

Ask Your Financial Advisor

Deciding exactly which strategies to adopt in reducing your tax bill during retirement can be challenging. There may be some strategies that will work for your situation while others may not be ideal options. Consulting with a knowledgeable financial advisor may make it easier to decide and empower you to develop a comprehensive retirement plan.