Trimming Taxes into Retirement

Retirement is the time for many things. You are free to explore your passions, travel, spend more time with family. It is also time to reevaluate your financial situations. By cutting your tax bill, you essentially end up with more money to spend on yourself during retirement.

When you retire, you stop collecting paychecks. This means you are living on other funds you have spent your life saving. There is a good chance that this change in income will put you in a lower tax bracket then what you were in when you were working. Being in a lower tax bracket means lower taxes. This can be a nice benefit to retirement.

While this is something that can happen naturally, there are other ways to actively save on your taxes into your retirement. So let’s look at somethings you can do to reduce your taxes.

Switch to a Roth

Many people have a 401(k) or a traditional IRA. A Roth can help reduce your taxable income since no federal taxes are due on Roth withdrawals. This is not the case for the other tax-deferred accounts, but the conversion to a Roth can take several years to accomplish.

When converting to a Roth stretch it out over several years, and only convert enough so it will not put you into a higher tax bracket. If you are under 65 and buying subsidized health insurance, a conversion is less attractive because converting will increase your income and decrease your subsidy.

Get a Leg Up

Since the bulk of your savings is in a tax-deferred account, a Roth conversion might not make since for you since you will need funds outside your 401(k) or traditional IRA to pay taxes on the conversion. Instead of converting, you might take distributions from you 401(k) or IRA while still in your sixties. You might save money by starting the withdrawals earlier and in a lower tax bracket as long as you are over the age of 59 ½ to avoid the 10% penalty you are subjected to in most cases.

Sell Some Stock

If you are in the 15% federal tax bracket or lower, then you do not owe capital gains taxes on the sale of securities held form more than a year. If you are in the higher tax bracket, then you owe at least 15% on the sale of any securities. So dropping to a lower tax bracket may give you the chance to sell off some stocks, especially if they have gone up in value and no longer fit your portfolio.

Remember circumstances change and so do the rules governing taxes, so revisit these strategies often and reevaluate you finances to ensure you are still saving money and it fits your current lifestyle.