Reducing Tax Burden Post-retirement


Very few of us have any income post-retirement, but those who have planned well will receive good returns from their various investments. Although one’s income level cannot be predicted post-retirement, expenses are a constant factor. You might have trimmed off a lot of expenses that you incurred while working such as traveling and household expenditures. However, other expenses will start to add up such as medication, maintaining a standard of living, and any hobbies you may pick up. Even though they are more measured, taxes will also stay.

Tax Planning for the Retired

Tax planning becomes more necessary once you retire because your income will be reduced. There are many ways in which taxes can be reduced and you must plan well for these. For instance, when you make a stock investment in an after-tax brokerage account, you will have to pay a capital gains tax when you sell your investment and earn profit. However, if the investment has been held for longer than a year, then it will be assessed for long-term capital gains tax. Also, if you fall in the 15% tax bracket, then your long-term capital gains tax rate will be zero. There are a few other measures you can adopt to reduce your tax burden.

Move to a Low Tax State

There is a state tax to be paid in addition to all the other taxes and its rates range between 0 to 10%. States like California and New York levy heavy taxes so it may be a smart idea to move out of such states. Many retirees are opting to move out to low tax countries, but for those who would prefer staying back, states such as Alaska, Nevada, Florida, Texas, Washington, Wyoming, and South Dakota are a good choice as they have no income tax. However, they do have other taxes such as property tax, sales tax, and fuel tax among other taxes. So, it is better to study their tax structure before moving in.

Carry No Debt Post-Retirement

If you wrap up all your mortgage payments and other debts before retirement, you won’t have to dip into your retirement savings to pay for them. How much you withdraw from your tax-deferred retirement accounts can have a large impact on your tax liability. Any withdrawal from the tax-deferred accounts will be taxed at your ordinary income tax rates. Also, you will have to pay a 10% penalty if you make a withdrawal before you are 59½ years old. It is better to use these accounts for your investment portfolio that are already taxed at your ordinary income tax rate such as individual bonds and bond funds. If your taxable income is under a certain amount, your social security benefit will also not be taxed.

Roth IRA

You are allowed to withdraw your Roth contributions anytime you like, tax-free and penalty-free. For those over the age of 59½ years and have held their Roth IRA for at least five years, all the earnings are tax-free.

Taxes cannot be completely eliminated, but you can apply a few smart strategies to minimize their impact. You can apply these strategies yourself or take the help of a finance professional who can help with proactive tax planning as well.

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