Skip to main content

Retirement Planning Webinar for Federal Employees: June 20 @ Noon EST

«  View All Posts

Smart Ways to Minimize Taxes in Retirement

November 16th, 2023 | 3 min. read

By Advance Capital Team

retiree filing taxes

Whether you’re retired or nearing retirement, it’s essential to think strategically about one of your potentially major expenses: taxes.

In retirement, your primary income sources – Social Security, pensions, and retirement savings withdrawals – are all subject to tax. Surprisingly, up to 85% of Social Security benefits can be taxed depending on your income level. Additionally, higher taxable income can significantly increase your Medicare costs through IRMAA (income-related monthly adjustment amount) surcharges. Thus, managing your taxable income is crucial.

Having provided retirement planning services since 1986, we at Advance Capital Management understand that effective tax planning can make a significant difference in your retirement savings. This not only amplifies your financial security but ensures that your hard-earned savings remain primarily in your pocket, not Uncle Sam’s. See our retirement planning services here.

With careful tax planning, you can significantly reduce this burden and enjoy your golden years with greater financial ease. In this article, we’ll share some tax-smart strategies to consider that may help reduce your taxes in retirement. Just keep in mind these don’t apply to everyone in every situation. Consult with a financial adviser to determine what makes sense for you.

1. Conduct Roth conversions

Converting traditional IRA or 401(k) savings to a Roth account can be a smart move. Although this incurs taxes during the transfer, it allows for tax-free growth and withdrawals in retirement.

Whether a Roth conversion makes sense for you depends on several key factors, including your current and expected future tax rates, the time you have before retirement, your financial goals and your ability to pay the taxes due on the conversion without dipping into your retirement savings. Learn more about Roth conversions in this article.

It’s important to consider how the conversion will impact your taxable income in the year of the conversion and to evaluate the potential benefits of tax-free withdrawals in retirement. Consulting with a financial advisor can help determine if this strategy aligns with your overall retirement plan.

2. Claim the higher standard deduction for people age 65 and older

At age 65, you qualify for an extra standard deduction, in addition to the regular standard deduction. In 2023, this is $1,850 for singles and heads of households, and $1,500 for each individual in married couples, whether filing jointly or separately. This additional deduction helps reduce your taxable income, thereby easing your tax burden.

3. Diversify your retirement income

Depending on your financial assets and situation, you may want to mix taxable and nontaxable income sources to keep your overall taxable income and tax bill low. This strategy involves balancing withdrawals from different types of retirement accounts​​. What counts as retirement income? Find out in this article.

4. Take advantage of capital gains tax rates

If it aligns with your overall investment plan, consider diversifying some of your investment portfolio to include assets that are taxed as capital gains rather than ordinary income. Capital gains tax rates are typically lower, with three brackets, including a zero-tax bracket. Investing in stocks, bonds and real estate could help you fall into the lower or zero capital gains tax brackets.

5. Withdraw extra from tax-deferred accounts in low-income years

To minimize taxes, you could withdraw more from tax-deferred accounts like traditional IRAs in years when your income is lower. This may help in managing your tax bracket more effectively​, as tax-deferred account withdrawals are subject to ordinary income taxes.

6. Make charitable contributions from RMDs

If you’re over 70.5 years old, consider using your required minimum distributions (RMDs) from a traditional IRA for charitable contributions. This can exclude up to $100,000 from your taxable income, offering a tax benefit even if you don’t itemize​​. Learn about more tax-smart ways to give to charity.

7. High tax bracket? Invest in tax-free bonds

High-income earners or those in higher tax brackets may find tax-free bonds, like municipal bonds, beneficial due to their tax exemption on interest income, which can help reduce federal, and sometimes state, taxes. However, they typically yield lower returns compared to taxable bonds, a trade-off for their tax advantages. Work with a financial adviser to determine if they make sense in your portfolio.

8. Keep your income in check

As you retire, it’s important to monitor your income levels, especially in relation to Social Security benefits. Income thresholds exist beyond which a portion of your Social Security benefits becomes taxable. For single filers, taxes apply if combined income is between $25,000 and $34,000, and up to 85% of benefits may be taxable if the income exceeds these thresholds​​.

9. Deduct Medicare premiums

If you itemize deductions on your federal income tax return, you can deduct your Medicare premiums as a medical expense. For self-employed individuals, these premiums may be deductible even without itemizing. However, in addition to itemizing your deductions, your medical expenses have to exceed 7.5 percent of your adjusted gross income (AGI). Additionally, those aged 65 or older can utilize funds from a health savings account (HSA) to pay Medicare premiums tax-free for themselves and their spouses.

10. Choose your retirement state wisely

Retiring in a tax-friendly state can significantly reduce your tax burden. States vary widely in their tax treatment of retirement income, with some having no income tax and others taxing dividends and interest only​​.

Retirement should be a time of relaxation, not tax stress. By incorporating these strategies into your financial plan – if they apply to your situation – you can work toward enjoying your retirement years with more financial freedom and less worry about the taxman. A great first step is scheduling a free consultation with an Advance Capital Management financial adviser right now.

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.