The taxman cometh, even for those in retirement. And if you don’t have a plan to reduce what you owe in your Golden Years, then the IRS may end up taking more than it is entitled to. Money in your pocket is always better than in the government’s.

However, according to a recent Northwestern Mutual study, one out of every three Americans is failing to plan on how to reduce their retirement tax burden. The old saying, failing to plan is planning to fail, holds true.

If you fall into that category, then here is your chance to make up for lost time. Below are the top 10 ways your fellow Americans are planning to keep the IRS out of their pocket while they are cruising their way through retirement.

Why is 24/7 Wall St. covering this?

• You worked hard for your money all your life so keeping the greatest part of it out of the taxman’s icy grip begins by planning early.
• There are numerous paths to take to minimize your retirement tax bill, and some are quite complicated and complex strategies that need years of planning to come to fruition.
• Because retirement planning is no longer a straightforward effort, consult with a tax professional and a financial planner early on to make best use of the options available.

10. Taking advantage of Qualified Longevity Annuity Contracts (QLAC)

You might not even have heard of a qualified longevity annuity contract, or QLAC. I hadn’t. But they are a type of annuity that are purchased with funds from qualified retirement accounts, such as IRAs and 401(k) plans. They provide retirees with a guaranteed stream of income and offer the added benefit of delaying the required minimum distribution age from 73 to 85. At the same time, retirees can ensure they won’t outlive their savings. Some 13% of Americans are planning to use a QLAC.

9. Using the basis paid into the cash value of permanent life insurance to remain in a lower tax bracket

Because the cash value of permanent life insurance grows on a tax-deferred basis, you don’t owe any income tax as long as the money remains in the policy. It’s like a Roth IRA in that regard. You only pay taxes on the gains made. Taking out just your contributions, there are no taxes due. Another 13% of Americans plan to do this.

8. Making contributions to other tax-advantaged accounts like a 529 

Northwestern Mutual found 14% of people were making contributions to tax-advantaged accounts like 529 college savings plans to minimize their tax bills. While there are no federal tax savings for a 529 plan, a number of states allow tax deductions for contributions. But the money in them grows tax-free and there are a number of strategies available to convert the money in the account to a Roth IRA for the student so they can jumpstart their retirement savings without any penalties or leaving funds stranded in the account. 

7. Using qualified charitable distributions from an IRA

By donating money to a charity from the funds in a traditional IRA, 17% of Americans will take advantage of the qualified charitable distribution rule. It can help reduce your income taxes by lowering your adjusted gross income.

6. Making Roth conversions prior to taking RMDs or Social Security

Another 19% of Americans plan to convert a traditional IRA to a Roth IRA prior to taking required minimum distributions (RMDs) at age 73 or before taking Social Security. They are doing so because once you are in the RMD period, no conversions are allowed. You have to take the distribution and be taxed on it. Only after satisfying the RMD can you make a conversion. If you are fortunate enough, you can get rid of the entire IRA before you turn 73 after which you will have no RMD and you end up with a tax-free Roth IRA. 

5. Using products like permanent life insurance or annuities for the tax benefits

Similar to using the cash value of your permanent life insurance policy to supplement your retirement income or pay for expenses, 22% of Americans also plan to use other strategies for the tax benefits. For example, you can take out a loan on the entire cash value of your life insurance, which is tax-free. Even better, you don’t have to pay it back while alive. If you die with an outstanding balance due, the policy pays it off and your beneficiaries receive the remaining value.

4. Using a Health Savings Account (HSA) or other tax-advantaged healthcare account

Slightly different than using the 529 college savings plan, which technically is only supposed to be used for educational expenses, you’re going to have healthcare costs in retirement and a Health Savings Account (HSA) or similarly tax-advantaged healthcare account can be used to pay for such expenses. The contributions grow tax-free and can be withdrawn tax-free when paying for qualified medical expenses. Fully 23% of Americans are using this strategy.

3. Making strategic charitable donations

Nearly one-quarter (24%) of Americans will make strategic charitable donations to lower their retirement tax bill. Generally speaking,cash contributions to public charitable organizations may be deducted up to 60% of adjusted gross income (private charities are limited to 30% to 50% of AGI). But particularly if you are in the RMD period, you can reduce your taxable income by making a a qualified charitable distribution (QCD). While you can’t count it as a charitable donation, it won’t be considered taxable income either.

2. Using a mix of traditional and Roth retirement accounts 

Some 30% of Americans plan to use a mix of traditional and Roth retirement accounts to reduce their retirement taxes as they provide tax-free and taxable withdrawal options. Each year you can choose which account you want to take money out of (or withdraw from both of them) to help you minimize your taxes.

1. Making withdrawals strategically from traditional and Roth accounts to remain in a lower tax bracket

Known as tax diversification, you can take distributions from your traditional IRA until you reach a higher tax bracket, then switch over to withdrawing tax-free money from your Roth IRA. This is an option 32% of Americans plan to take, making it the most popular choice of all the options available.

Key takeaway

Because many of these options are complex and complicated, consult with a tax professional and a financial planner well in advance of needing to choose between them. Quite often, you will have to plan years ahead of using them to gain full advantage.

A mix of options is often the best strategy to minimize how much the cold, dead hands of the taxman can take from your retirement income.

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