Can You Pay Less in Taxes on Your Retirement Income? Innovative Strategies to Explore

Retirement should be about enjoying your hard-earned savings, but taxes can take a significant bite out of your income if not carefully managed. Fortunately, there are several creative strategies to reduce your tax liability, from relocating to tax-friendlier locales to savvy timing and planning. Here’s how you can potentially decrease the taxes on your retirement income.

Consider Relocating to a Lower Tax Jurisdiction

One of the most straightforward ways to reduce your tax bill is by moving to a state with lower tax rates. Several states, including Florida, Texas, and Nevada, do not tax individual income, which can mean significant savings, especially if you’re drawing income from retirement accounts or receiving pension payments. This strategy can also be extended internationally for those adventurous enough to consider retiring abroad in countries with favorable tax treaties for American retirees.

Strategic Withdrawal Planning

The order in which you withdraw funds from your retirement accounts can significantly impact your tax liability. Consider drawing from taxable accounts first (like brokerage accounts), then tax-deferred accounts (like IRAs and 401(k)s), and finally, tax-free accounts * (like Roth IRAs). This potential strategy can possibly minimize your taxes early in retirement and provide tax-free income later when other savings might be depleted.

Timing Is Everything

If you're on the cusp of a lower tax bracket, consider deferring some income to the next year to keep your current year's income lower and taxed at a lesser rate. This might involve delaying year-end bonuses, managing the timing of large withdrawals from retirement accounts, or even timing the sale of investment properties or stocks.

Make Use of Tax Credits and Deductions

Stay informed about tax credits and deductions for which you may be eligible. For instance, the Senior Tax Credit for the Elderly and Disabled can offer benefits if you qualify. Similarly, medical expenses can often be deducted if they exceed a certain percentage of your income, which is not uncommon for retirees facing significant healthcare costs.

Investing in Municipal Bonds

Consider adding tax-exempt municipal bonds to your portfolio. The interest from these bonds is typically exempt from federal income taxes and, in some cases, state and local taxes if you live in the state where the bond was issued. This can provide a steady income stream without increasing your tax burden.

Roth Conversions

Converting part of a traditional IRA to a Roth IRA can be a strategic move, especially in years when your income is lower. While the conversion triggers a taxable event, the money then grows tax-free in the Roth IRA and can be withdrawn tax-free in retirement, potentially saving you money if tax rates are higher in the future or your income spikes.

Charitable Remainder Trusts (CRTs) for HNW Individuals

High net worth individuals might consider setting up a Charitable Remainder Trust (CRT). This allows you to place assets in a trust, take an immediate tax deduction, receive income from the trust for a specified period, and ultimately benefit a charity. CRTs are excellent for managing taxes, providing income during retirement, and reducing estate size for tax purposes, all while supporting charitable goals.

Conclusion

Yes, you can pay less in taxes on your retirement income, but it requires thoughtful planning and proactive management of your financial resources. Whether it’s moving to a state with no income tax, strategically timing withdrawals, or investing in tax-advantaged assets, there are numerous ways to reduce your tax exposure. Consider consulting with your retirement planner and tax professional who can tailor these strategies to your unique financial situation, ensuring you maximize your income and minimize your taxes in retirement.

*Any opinions are those of Vivian Investment Partners and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation of any mentioned strategy. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. *Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.