Retirement Tax Planning

There are numerous tax savings strategies designed to help retirees. Those strategies include:

• Investing in a tax-advantaged retirement account – The single most important thing people can do to prepare for retirement is to identify and invest in the right tax-advantaged retirement account. This requires some future casting, because your current and future tax bracket will influence what type of account you should choose.
  
  For example, if you expect to be in a higher tax bracket when you retire, then consider investing in a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars, so you will pay less in taxes now and enjoy tax-free distributions once you reach retirement age.
  
  If the opposite is true and you expect to be in a lower tax bracket following retirement, then a traditional IRA provides a tax advantage because contributions to a traditional IRA account are tax-deferred. You’ll pay taxes when distributions are taken out, and less than you would if you paid out of a higher tax bracket up front.
  
  A retirement tax advisor can also help convert assets from a traditional IRA to a Roth IRA if your long-range tax picture changes.
  
  
• Starting up a spousal IRA – If there’s only one working spouse in the home, a second IRA may be opened up in the non-working spouse’s name. The couple’s joint income is used to determine contribution limits, which means many households can double their retirement account contributions.
  
  
• Contributing to a health savings account (HSA) – HSAs are only used for qualified medical expenses, but chances are you’ll have additional medical expenses as you enter retirement. These expenses can be paid for, tax-free, out of an HSA account.
  
  Contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for a family plan.
  
  
• Establishing a permanent life insurance policy – Life insurance policies can serve double duty for people who aren’t retiring for a while. Their primary purpose is to provide income to loved ones once the policyholder passes. This income is passed to beneficiaries tax-free.
  
  In addition to providing peace of mind and money to loved ones, some life insurance policies – whole life and universal life, specifically – accrue cash value the longer the policy is maintained. Taxpayers may withdraw money out of a life insurance policy early, on a tax advantaged basis. However, there may be penalties for early withdrawals, so it’s recommended that policyholders consult with a financial or retirement planning advisor first.
  
  
• Setting up a charitable remainder trust – Charitable remainder trusts allow people to generate income from their charitable giving and provide a large gift once the trustee passes away.
  
  Charitable remainder trusts are funded by the trustee using liquid assets like cash. Part of the interest generated on those assets is paid out to the trustee (or a named beneficiary), while the rest is given to the charity. When the trustee dies, any assets remaining in the trust are given to the named charities. Taxpayers often qualify for a tax deduction during the tax year the trust is funded. Part of this deduction may be carried into future tax years.
  
  
• Investing in municipal bonds – If you live in a state with a state income tax, or if you’re in a higher tax bracket, municipal bonds represent a simple and tax-advantaged investment. Interest earned on municipal bonds are typically paid out tax-free, and this includes state and local taxes if the bonds are issued from your home state.
  
  
• Planning out income around Social Security benefits – Delaying Social Security benefits may improve your retirement tax situation if you have other sources of income to compensate. Doing so will increase your benefits once you start receiving them. Further, Social Security benefits are taxed according to your adjusted gross income (AGI). Retired workers who make more than $25,000 a year ($32,000 for married, joint filers) will have to pay income taxes on 50 percent of their Social Security income. Anyone making more than $34,000 ($44,000 for married, joint filers) will have to pay income taxes on 85 percent of their Social Security income.
  
  Reducing AGI through IRA and 401(k) plan contributions is one way to control your income as you approach retirement. Being mindful of when to liquidate assets is also important, and strategic Roth IRA withdrawals can also help with tax planning purposes, as they are not factored into the Social Security taxation formula.