6 Ways to Minimize Your Taxes as You Retire

Oct 23, 2019


As you inch toward retirement, it’s important to maximize your retirement savings. One thing you can do to maximize your nest egg is to identify ways to minimize your taxes as you retire.

Many pre and post-retirees don’t realize that their traditional IRA and 401(K) distributions, Social Security benefits, and brokerage withdrawals are subject to taxation.


So what do you do to reduce your tax burden in retirement? Here are a few suggestions to help you minimize your taxes as you retire.


Contribute to a Roth IRA


One of the best ways to reduce your tax liability in retirement is to begin contributing to a Roth IRA. With a Roth IRA you can contribute with post-tax dollars. Then, in retirement, you can make tax-free withdrawals. You can pay taxes now while you let your retirement savings grow.


You can contribute to a Roth IRA by opening one with your financial planner, contributing to a Roth 401(k) if your employer offers one, or converting your traditional IRA to a Roth. If you plan to open one with a financial planner, you will have to meet the income requirements. Keep in mind, if you want to convert your traditional IRA to a Roth, it’s wise to work with a tax advisor to ensure you follow the IRS guidelines to avoid penalties.


As of 2019, you can contribute up to $6,000 to your Roth IRA each year. If you’re 50 or older you can contribute an extra $1,000 per year, making your total contribution limit $7,000. However, there are additional contribution limits for taxpayers who earn too much.


Open a Health Savings Account


For individuals who have high-deductible health care plans, you may want to consider opening a Health Savings Account or HSA. You can contribute to an HSA with pre-tax dollars that can grow on a tax-deferred basis. If you use the money for qualified medical expenses, you may never have to pay taxes on your distributions.


Additionally, since health care is one of the most expensive costs in retirement, an HSA account can help you minimize the shock of your health care expenses as you age. For more information on a HSA account, visit irs.gov.


Create a strategy to manage your withdrawals


Everyone has a different financial situation that may require a different withdrawal strategy. Identifying the best way to optimize your distributions can help you avoid paying Uncle Sam more than you legally owe. For example, if you have a traditional IRA or 401(k) and a Roth IRA or Roth 401(k), you may want to take your distributions from your traditional IRA when you’re in a lower tax bracket. Then, when you’re in a higher tax bracket, you may want to take distributions from your Roth account.


Since money from your traditional IRA is taxable, it makes sense to only take distributions out of this account when necessary. You may also want to consider converting your traditional IRA dollars during lower-income years. This will help you lower your tax bill while continuing to save for the future.


You may want to work with your financial planner to create your very own customized withdrawal strategy. A financial planner can help you paint your entire retirement picture while optimizing your savings.


Reduce your expenses


The less you need to live on in retirement, the less you will need to withdraw from your retirement accounts. This will assist with lowering your tax bill, depending on the account you withdraw from.


One of the biggest expenses you may want to focus on is your mortgage. Hopefully, by the time you retire, you’re paying more on the principal than on the interest. If this is the case, then you may not be able to deduct your mortgage interest. If you focus on paying off your mortgage before retirement, it may be beneficial to your tax bill. For more information about mortgage interest deductions visit irs.gov.


Another thought to consider when wanting to minimize taxes is moving to a different state. Since some states don’t tax retirement income or have an income tax, you could end up saving a significant amount of money on your tax bill.


Donate to a cause you’re passionate about 


If you have a traditional IRA or 401(k) you will have to begin taking distributions once you reach 70 ½. If you end up in a situation where you don’t need your full distribution amount for living expenses, you may consider donating all or a portion of your required distributions to your favorite charitable cause. This type of distribution is a qualified charitable distribution (QCD). This tax advantage lets you avoid income tax up to $100,000 a year. Keep in mind, the amount you can put toward a donation cannot exceed the amount that you must withdraw.


Delay your Social Security benefits


Did you know your Social Security benefits are taxable? If you choose to file a joint return and you and your spouse have a combined income of between $25,000 and $34,000, you may be taxed up to 50% of your benefits. If you have more than $34,000 of income your taxes may be taxed up to 85% of your benefits.


Delaying your Social Security benefits may help you better manage your taxes in retirement. You may want to first draw from your savings or Roth IRA in the earlier years of retirement.  Then, you can apply for Social Security at a later date. Not only will this potentially save you some money on taxes, but it may also help you increase your benefit as well.


The bottom line


Minimizing your taxes in retirement can help you save money while allowing you to live a more comfortable lifestyle. But, if you don’t know where to start, partnering with a financial planner can help guide you in creating the ultimate tax strategy to minimize your tax burden.


If you’re looking for a financial planning partner who can help you realize your retirement goals, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.


If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals transition into retirement with confidence, and we’d like to do the same for you.



Providing for family, spending time with grandkids, traveling. You shouldn’t be wasting your golden years worrying about electric bills or the balance of your checking account. We’ve helped hundreds of people retire confidently and we can’t wait to do the same for you.

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