Retirement Tax Planning – Reduce Your Taxes 

retirement tax planning, senior couple managing finances with accountant
December 21, 2023

While many soon-to-be retirees focus on the future benefits of retirement planning, such as the new adventures, trips, and activities on the horizon, finances should also be an integral part of any retirement game plan, and that strategy should include annual taxes.  

Financial planning after retirement (and well before retirement, for that matter) is essential. Simply because once an individual retires, the guidelines surrounding annual taxes change. However, taking steps before and after you retire can minimize the taxes you owe year after year and can ensure you have plenty of funds to set off on the adventures ahead. 

So, how is retirement income taxed, and how can you reduce this amount well into the future? Talking to an expert for retirement tax planning advice is the best first step. In the meantime, consider these small strategies that can greatly impact your bottom line during your retirement years. 

How is Retirement Income Taxed? 

How your retirement income is taxed relies on a range of factors, including the source of your income, and the amount. For example, according to the IRS, about 40% of people who get Social Security benefits must pay federal income taxes on these benefits. Therefore, this generally occurs if you have another substantial income as well. 

Social Security Taxes 

Retirees can expect to pay taxes on their Social Security benefits based on IRS guidelines if any of the following situations apply: 

  • You file an annual federal tax return as an “individual,” and your combined income* is 
  • Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. 
  • More than $34,000, up to 85% of your benefits may be taxable. 
  • You file a joint annual federal tax return, and you and your partner have a combined income* that is: 
  • Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. 
  • More than $44,000, up to 85% of your benefits may be taxable. 

Other Retirement Income Taxes 

The specifics of how other income is taxed during your retirement years can vary widely. For example, you may be taxed on the retirement you withdraw from a savings account based on the account type.  If you pick up a new freelance opportunity or side gig, you may be subject to other income taxes, like self-employment tax. 

The best way to navigate these scenarios is to consult with a tax professional who can thoroughly review your expected income and suggest intelligent and effective ways to save money now and in the future.  

Strategies to Reduce Your Taxes During Your Retirement 

Regardless of your unique financial situation, you can employ a few broad strategies now, before, or during retirement. This way, you can ensure more of your hard-earned income stays in your pocket.  Some of these strategies include the following: 

Review Your Retirement State 

If you are planning a move during your retirement, bear in mind that some states are more tax-friendly than others. For example, there are nine states that have no income tax at all and two states – Tennessee and New Hampshire – that only tax your interest and dividends. 

Convert or Contribute to Roth Accounts for Retirement Savings 

If you are still working, consider converting or contributing to an after-tax retirement account like a Roth IRA or 401(k). You may pay taxes in the year that you make a conversion to a Roth account, but the later withdrawals during your retirement years will be tax-free. 

Strategize Your Withdrawals, Your Timing, and Your Tax Bracket 

Timing and tax brackets can play a significant role when it comes to withdrawals during your retirement. For example, if you are in the 10% tax bracket in a specific year, a $20,000 distribution from your traditional IRA will cost you $2,000 in taxes. However, if it’s a year where you have more income due to other sources like side jobs, that $20,000 distribution will equal around $4,800 in taxes if you suddenly fall in the higher 24% tax bracket. 

As a result, when you have more income during your retirement years – due to selling stocks, capital gains, side employment or other income – be sure to minimize withdrawals from pre-tax accounts to minimize your overall income and taxes.  

Consider tax-free bonds 

Reviewing your investment portfolio is essential at any age or stage of life, and one appealing option for individuals as they inch closer to retirement is tax-free bonds. While not all bonds are exempt from certain taxes, some – like state, local, or municipal bonds – will be exempt from federal income taxes and possibly even state or local taxes. 

While tax-free bonds tend to pay a lower interest rate than other taxable bonds, the trade-off may be worth it. Your tax expert will be able to help you determine if tax-free bonds are a solid option for your distinctive financial situation. 

Stay Informed and Seek Professional Advice from our Tax Experts 

 Remember that the adjustments you make now to minimize your taxes may not be as effective in the years ahead.  

Tax laws and guidelines are constantly evolving, and as these situations change, they may have an impact on your bottom line and the taxes you owe. (For example, tax brackets are scheduled to increase in 2024 due to inflation, which may put individuals in a lower tax bracket than in 2023.) 

Tax Planning Strategies for Retirement with Waters Hardy  

The best way to plan now and effortlessly navigate any hurdles or changes ahead is to partner with a tax expert. 

At Waters Hardy, we’re committed to providing the best guidance possible to our clients, regardless of their goals, and finding solutions to minimize taxes at every stage of life. From creating strategies for your retirement now to reviewing your income and potential taxes well into your golden years, we can provide professional and expert assistance every step of the way. 

Reach out to us today to start a conversation about your unique financial situation, your unique retirement goals, and how we can help. Waters Hardy is at your side for all of your retirement tax planning needs. With the right strategy, you can ensure that you put the money you’ve worked hard for all your life to good use throughout your retirement years.  

Contact us today.  

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