Nothing is certain but death and taxes, even in retirement. Perhaps because many believe their tax bill will be lower when they’re no longer working, they have no plans to minimize their taxes further.

According to a study by life insurer Northwestern Mutual, fewer than one in three Americans have mapped out a plan to reduce their tax burden in retirement. That’s a big mistake. Because of a number of factors, including government program policies, taxes can be much larger than retirees realize.

Because you will likely be living on a fixed income in retirement, minimizing your taxes is even more important than during your working years as it will greatly determine how much you have to live off of. And if you’re forking over a larger amount than you might otherwise have had to, you may find yourself stressed out trying to make ends meet.

A little advance planning goes a long way to that comfortable retirement you’ve been counting on.

24/7 Wall St. Insights:

• There is no escaping taxes, not even in retirement. Limiting the amount you will have to pay in your Golden Years requires thoughtful planning now.
• Some of your Social Security benefits are subject to federal taxes if your income exceeds certain levels.
• RMDs, or required minimum distributions, from certain tax-advantaged accounts could send your tax bill soaring, so begin mapping a path for minimizing them today.

Social insecurity

Although a growing number of people doubt Social Security will be there for them when they retire, millions of Americans still depend upon it and millions more may be forced to do so when it becomes their time to collect. What might not be obvious is you could end up owing the IRS a lot of money as a result.

If you still earn income while collecting Social Security, you could become subject to taxes if your total income is above a certain threshold. It could also impact other benefits you receive, like Medicare Part B and D premiums. It is a delicate balancing act, but you could minimize the effect by having Social Security withhold taxes from your check just as your employer does.

You might also move to a state that doesn’t tax income and some don’t tax Social Security benefits, too.

Tax the money, or else

Once you turn 73, the government requires you begin making withdrawals from certain tax-advantaged accounts like 401(k) plans and Individual Retirement Accounts. Called required minimum distributions, or RMDs, they could push you into a higher income tax bracket. Roth IRAs, because they are after-tax contribution plans, don’t have RMD mandates.

These requirements might offer you the chance to withdraw money from these accounts sooner if you retire earlier and are in a lower tax bracket. You might also do a partial Roth conversion, which moves money from a traditional IRA into a Roth IRA. The money converted is taxable, but doing it in stages lets you spread out the taxes owed over time.

You might also consider moving funds into bonds. Treasuries are typically exempt from taxes at the state level and municipal bonds are exempt from federal taxes.

State of health

Healthcare costs could be one of your biggest expenses in retirement, so by opening a health savings account (HSA), you can shield money from taxes because withdrawals for medical expenses are exempt.

You are also not required to spend all the money in your HSA year-to-year and you can invest the funds in a tax-efficient manner. Because the accounts keep the taxman at bay, you won’t have to tap other accounts that might incur a tax if you used them to pay your healthcare bills instead.

Key takeaways

Tax considerations don’t end just because you retire. They actually become more critical because of your limited means for paying taxes. The government doesn’t care if it impoverishes you so long as you pay what is due. That means planning for your retirement taxes now, before you retire, is just as much an essential component of retirement planning as how big you want your 401(k) to be.

There are many factors to consider, such as how income and taxes will affect your Social Security benefits, and whether required minimum distributions from retirement accounts will have the taxman knocking at your door. Make plans now and consult with tax and financial planning professions while you still can so that you are not overwhelmed when tax time comes around.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.