Tax-savvy strategies for a secure retirement

Retirement should be about enjoying life, not stressing over taxes.

Many retirees, however,  find themselves paying more in taxes than expected, reducing their disposable income for travel, hobbies and other pursuits. This guide offers strategies to help understand taxes in retirement and minimize tax burdens as much as possible, ensuring you keep more of your hard-earned money to live the retirement you want.

Since their income will be lower, many retirees will pay less in taxes. But if they don’t withhold enough from their income sources, they may wind up owing money at tax time.

Retirees need to know that their primary sources of income are taxable: Pensions are taxed as ordinary income, as are distributions from IRAs and employer-sponsored retirement plans like 401k funds. Also, 50% of Social Security benefits are taxed when income is above $35,000 for a single filer and $44,000 for those who are married filing jointly. An effective tax payment strategy is to withhold taxes from Social Security equal to the tax liability on that income net of the standard deduction, then withhold from all the other sources of taxable income at the level of the tax bracket that the distribution will put you in.

After retirement, wages cease and income comes from Social Security, pensions, IRA withdrawal, interest income, and dividends and capital gains on IRA investments. Properly timing withdrawals from IRAs and when taxes are incurred on investments can help control your tax liability.

If taxable interest income isn’t needed for living expenses, consider shifting investments to tax-deferred investment vehicles to reduce immediate taxation.

Capital gains are taxed at a lower rate than ordinary income but will only receive this more favorable tax treatment when investments that qualify for capital gains are placed in after-tax (non-IRA) accounts.

Having the same investment allocation in IRA and non-IRA accounts might not be tax efficient. Create an overall risk allocation for your entire portfolio and place investments that generate qualified dividends and capital gains in non-qualified when possible to fit your overall investment allocation. Place vehicles that are taxed as ordinary income into pre-tax accounts.

Converting traditional IRAs to Roth IRAs if you are in a lower tax bracket now than you will be in the future allows for tax-free withdrawals in the future, which could also reduce taxation of Social Security benefits. You or your beneficiaries will pay taxes on IRA accounts as the assets are withdrawn. Taxpayers should take advantage of the discretion they may have as to when to take distributions or do Roth conversions.    

The capital gains tax rate is 15% for most individuals, but some retirees may qualify for a 0% rate by strategically timing their gains in low-income years.

Up to 85% of Social Security benefits can be taxed if provisional income crosses certain thresholds. Strategic Roth conversions and controlling taxable income can help mitigate this issue.

Short of having high mortgage interest, being a very generous donor, or incurring high out-of-pocket medical expenses, taxpayers generally do not qualify for itemizing deductions. However, bunching up deductions that would ordinarily be incurred over two tax years into a single tax year might provide enough deductions to itemize.

Offset capital gains on investments by incurring tax losses — selling investments that have an investment cost-basis (loosely defined as the cost of having acquired it) that is higher than the market value, unless the investment is expected to outperform other investments.

Utilizing donor-advised funds or donating appreciated assets can lower capital gains tax while providing a charitable deduction.

Taxpayers who are over age 70½ can take advantage of qualified charitable contributions, making contributions directly from their IRA accounts without them being considered taxable events and having them count toward required minimum distributions they may need to take. Both these contributions are tax-deductible.

As you look at your retirement plan, it's crucial to consider taxes so you can implement proactive strategies. Consult a financial advisor to optimize your tax plan, ensuring that more of your savings go toward funding your dream retirement, not the IRS.