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How to Minimize Taxes in Retirement

How to Minimize Taxes in Retirement

August 16, 2023

Taxes—a vital component to consider when retirement planning.

Knowing how to manage your taxable income can be a feat of its own and there are options when choosing the right strategy to help minimize your taxes in retirement. As you approach your retirement date, discuss which options can work with your plan.

1. Roth Conversions

If you have sizable balances in traditional IRAs or an employer plan such as a 401(k), the required minimum distributions (RMDs) can represent a significant tax hit each year.

Is there a way around it? There can be with a little help from a Roth IRA conversion. By converting money from a traditional IRA or employer plan to a Roth IRA, you can reduce your future income taxes.

Lower RMDs mean less taxable income, which can result in lower taxes on Social Security benefits, lower Medicare premiums, and potentially greater deductions for items tied to your Adjusted Gross Income (AGI). Reducing or eliminating RMDs through Roth conversions can have a dramatic impact on your future tax costs.

Want to know how Roth IRAs and Traditional IRAs differ? Read article

2. Qualified Charitable Deductions (QCDs)

If you’re over age 73 each year you must take required minimum distributions (RMDs) from your retirement accounts. Failing to do so results in a hefty penalty—50% of the amount you should have withdrawn. But what if you don’t need the income? What if taking the RMD will increase your tax burden or Medicare insurance premiums?

To avoid receiving your RMD as income, you can transfer up to $100,000 from your IRA to a qualified charity. This satisfies your RMD and prevents any unwanted additional income that would increase your tax burden. Importantly, a donation you make from income you’ve already received doesn’t qualify as a QCD.

While the SECURE Act 2.0 raised the age to start RMDs to 73 as of January 1, 2023, the age for taking a QCD was left at 70½. Even if you are not yet offsetting an RMD, the QCD is still a tax-free way to use IRA funds for a charitable contribution and will reduce the amount subject to RMDs in future years.

3. IRA Contributions Beyond 72

The SECURE Act removed the maximum age, formerly 72, for contributing to a traditional IRA account. If you have earned income from employment or self-employment, you can make pre-tax contributions to a traditional IRA account. This serves to reduce taxable income for the year and adds additional tax-deferred savings to your account. Any income restrictions for those who are working and covered by a workplace retirement account will still apply.

4. Deferring RMDs While Working

If you’re working past the age 73 you can postpone taking RMDs from your current employer’s 401(k), 403(b), or 457 plan, as long as you do not own 5% or more of the company. The employer must opt to offer this deferral. 

If their plan allows it, you can potentially do a reverse rollover of an IRA or old 401(k) plan into this plan as well, given those funds were originally contributed on a pre-tax basis. These funds will not be subject to an RMD either. Before completing a rollover, you should assess the quality of the investments offered by your current plan. RMDs connected with other retirement accounts must still be taken; this deferral does not apply to those accounts. 

Need help with creating a tax-efficient retirement plan or have questions?

We believe offering stable strategies to help reduce taxes during retirement is equally as valuable, as taxes can take a bite out of your retirement income if not done properly.

Please contact us at 207-761-4733, email, or schedule a call.