Taxes are one of our most significant expenses in life, and though we always pay our fair share, we don’t wish to pay more.  To reduce taxes in retirement, we must understand how money is taxed then minimize this.  We know that the sooner you begin saving, the more you will have in retirement; likewise, the sooner you begin tax planning, the lower your taxes will be.  Here are five tips to make your nest egg go further.  

  1. Retirement Savings Accounts- long-term saving with these is indispensable and now possible after age 70½.  Know their differences and maximize your savings limits.
    1. 401(k)s- are pretax investments with your employer matching a portion.  In 2021 these allow a $19,500 maximum contribution (+$6,500 for those age 50+).
    2. Roth 401(k)s– after-tax employer plans where withdrawals are tax-free (if held 5+ years) best for high earners.
    3. Traditional IRAs- pretax income ($6,000 limit for <50 years old and $7,000 if 50+ yrs)
    4. Roth IRA- after-tax income with same limits as Traditional IRAs (but can not be combined), however, withdrawals for Roths are untaxed
  2. Diversify investment on a tax basis
    1. Deferred taxes– Invest in assets with taxes deferred until withdrawn (401(k)s, traditional IRAs); taxes not paid when money made nor through compounding, only on distributions.  Lower income gets taxed at a lower rate in retirement.  
    2. Tax-free investments– (put in Roth IRAs) purchased using after-tax income, will not have to pay taxes on growth nor distributions.  
    3. Taxable accounts– place most other investments with lower taxes (long-term investments, municipal bonds) 
  3. Allocate the types of investments
    1. Tax inefficient investments- (fixed income, commodities, REITs) go into untaxed accounts
    2. Other assets- consider an IOVA (low-cost Investment-Only Variable Annuity) to defer taxes even more. 
  4. Understand Required Minimum Distributions-For 401(k)s and Traditional IRAs, if you turned 70½ in 2020 or later, you can postpone distributions until April 1st of the year after reaching age 72.  However, some can reduce their taxable income by taking their RMD earlier; waiting may put them into a higher tax bracket. 
  5. Take Advantage of Roth Conversions– RMDs and delayed Social Security disbursements may put you into a higher tax bracket.  A Roth conversion can help lower your tax burden because Roth IRAs don’t have RMDs.  A conversion is a taxable event, but future withdrawals are untaxed, assuming the person converting is over age 59½ and had the account for a minimum of five years.  Timing is essential; to lower the tax burden, one must conduct the Roth conversion in a lower-income year.   


These guidelines and strategies will reduce your taxes to their lowest levels in retirement, but remember, planning is essential; some of these strategies are only possible when conducted at the most advantageous time.

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