Lowering Taxes After Age 65

Managing your taxes in retirement is important as ever. In retirement, you may have income from various sources, with each one having tax rules that might differ from others. One nasty tax surprise can reduce your fixed income in retirement without an easy way to make up the loss. However, understanding the rules can help minimize taxes.

Compare Taxes

Each source of your retirement income has its own individual tax effect. For example, realized gains from taxable investments held at least one year incur a tax ranging from 0% for those with the least income to 20% for more affluent investors. The majority of investors in between, with a 15% capital gains tax, need to compare this against the reduced federal income tax rate on distributions from a traditional IRA or 401(k) plan to determine a withdrawal strategy.

You may also want to consider when to begin withdrawing money from a tax-free Roth IRA if you have one. You aren’t required to take minimum distributions from a Roth during your lifetime. Not so with a traditional IRA or 401(k) plan, which require minimum distributions by age 70 1/2. Failure to meet this deadline may result in a stiff penalty on the required amount not withdrawn. If you qualify by income, converting some or all of a traditional IRA to a Roth IRA in a down income year may also make sense.

Other Challenges

Depending on your state and income, Social Security benefits may be tax-free. Also dependent on your state are your total tax deductions. With the new state and local tax (SALT) deduction limit of $10,000 from combined state income and real estate taxes, you might consider downsizing your home or even moving to a state with low or no income and real estate taxes.

When to begin drawing Social Security benefits is another question to answer. Taking them before full retirement age may reduce your benefit permanently, while the benefit permanently increases for every year of delayed payments up to age 70. And if you continue to work, you can still contribute to an IRA or 401(k) plan. Talk to your financial professional to learn more.