Saving on Taxes After Retirement

There are some things taxpayers can do, before and after retirement, to reduce their tax burden after they retire. Talking to one of our PA expert tax accountants can be the critical help you need to minimize taxes while maximizing income. 

Planning for future taxes pre-retirement

Strategic contributions to a traditional IRA, Roth IRA, or taxable account may help decrease taxes during retirement when it is less likely that there will be a lot of extra income to cover taxes. 

People over 50 can contribute an extra $1,000 per year to an IRA, which would lower their current tax bill while putting a little more money away for retirement. This is true also for 401(k) plans, which allow catch-up contributions after the age of 50. You can also choose to pay in post-tax dollars. In this case, your distributions after retirement will not be taxed. 

That said, if you’re over 59.5 years old, you may want to consider moving money from tax-deferred accounts to a Roth IRA or taxable account. You would have to pay taxes now on the distribution, but it would lower the required minimum distribution (RMD) at age 72. Look at your current income within the tax bracket. If there is wiggle room below the top cut-off, and you’re over 50, your accountant can work with you to determine the right amount of money to move that will keep you within the current tax bracket and this year’s taxes within your budget. 

A taxable investment account is a great location for tax-free or lower-tax investments such as tax-free bonds. In many cases, the taxes on long-term capital gains will be lower than a person’s ordinary tax bracket: 0%, 15%, or 20%, depending on income. With the help of one of our accountants, you could move some of your savings into a taxable account, decreasing future tax payments. 

If your employer offers a Health Savings Account (HSA) to pay healthcare expenses, you may want to fund it as much as possible. Many financial experts consider it a preferred way to save for retirement medical expenses rather than using a traditional retirement account. They are tax-deductible if you pay with your own funds, or if paid via payroll deductions, they are made on a pre-tax basis and thus lower your taxes liability. What’s even better is that withdrawals for qualified medical expenses are tax-free.

Reducing taxes post-retirement

Social Security Income (SSI) is non-taxable unless you have additional income. How much of your SSI would be taxable depends on your income and your filing status. For instance, in 2021, if a single retired taxpayer’s gross income + nontaxable interest + half of SSI was between $25,000 and $34,000 (between $32,000 and $44,000 if filing jointly), the taxpayer would pay taxes on half of SSI. If more than $34,000, the retiree would pay taxes on 85% of SSI. 

This is a good example of why it’s important that you be strategic with regard to income and distributions. You will want to carefully plan withdrawals from pre-tax plans such as traditional IRAs and 401(k)s in order to keep your SSI taxation low. Pension distributions are taxable and generally can’t be adjusted. 

Even after retirement, you may want to consider converting a traditional IRA to a Roth IRA, paying the taxes now instead of later. This may be a good option if you’re still working and able to pay the taxes while you have the additional income. 

Be prepared for the required minimum distributions (RMD) from retirement plans (except Roth IRAs ­­– another reason to convert) beginning the year you turn 72. If the withdrawals aren’t made on time, the penalty is 50% of the amount that should have been withdrawn. 

One way to take the distribution without having to pay taxes on the entire amount is to pay some directly to a charity. If, for instance, you are required to withdraw $30,000, you can direct the fund manager to send $10,000 directly to a charity of choice, thus only paying taxes on $20,000. If desired, the entire amount can be sent to charity. 

Taxes aren’t the only reason to avoid accidentally sliding into a higher tax bracket; when the tax bracket goes up, so do Medicare premiums, which can cause serious hardship for some people. 

You do still have a couple of deductions, even when you take the standard deduction. Fortunately, standard deductions for retirees are higher than for non-retired taxpayers. In addition, those who are self-employed during retirement can deduct Medicare Part B and Part D premiums, as well as supplemental Medicare or the Medicare Advantage plans. This is only if you do not have access to health plans through your employer or your spouse’s employer. Those who do not itemize can also deduct up to $600 in cash donations (if filing jointly) as of 2021. 

Retirees and those approaching retirement will benefit greatly from reaching out to one of our tax experts to help them navigate the complex rules of retirement taxes. Don’t leave money on the table or pay more in taxes than you have to at a time when you may not have additional income. Contact one of our tax experts today.