Hyden, Miron & Foster, PLLC Law Blog

Wednesday, September 21, 2016

Enjoy Your Retirement Years by Lowering Your Taxes

What steps can I take to reduce my taxes during retirement?

You likely have a lot of plans for your first few years of retirement.  You may want to travel, take up a new hobby, or simply enjoy your new free time.  In addition to pursuing your passions, you should consider taking the time to follow some important steps that could potentially lower your tax bill for the remainder of your life. 

During the first few years of retirement, as you stop receiving a paycheck and start living off other funds, such as a pension or investments, your income will likely drop to a lower bracket. This means you will pay a lower federal tax rate, but your low-tax days may not last.  Once you start accessing your tax-deferred accounts and Social Security, you could be boosted back up into your higher tax bracket.  With some advance planning, you can take advantage of your temporarily low tax rate and set yourself up for decades of tax savings.

Convert to a Roth

You may wish to consider converting your 401(k) or traditional IRA to a Roth.  This can significantly reduce your taxable income in the future because you will not have to pay federal taxes on Roth withdrawals, unlike other tax-deferred accounts.  Converting while you are in a lower tax bracket is a perfect time since you will need to pay income tax on the amount converted.  You do not have to convert all at once; rather, you can convert small amounts over time so that you do not push yourself into a higher tax bracket. 

Start Taking Deductions

For some retirees, rather than convert to a Roth, you will save more by starting to take distributions from your tax-deferred savings account early on, while you are in a lower tax bracket.  This can help you to delay claiming Social Security and save on future tax liability by reducing your savings account balance.

Sell Your Stocks

If you are in the 15% tax bracket, now may be a good time to sell some securities as you will not owe capital gains tax if you have held your stocks for more than a year.  While these suggestions will benefit many, you should consult with a tax attorney to develop an individualized plan for reducing your taxes during your retirement years.


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