How do I reduce my taxes in retirement?
Smart Withdrawal Strategies
In retirement, your income often comes from a mix of Social Security, pensions, and withdrawals from taxable, tax-deferred, and Roth accounts. Withdrawing from taxable accounts first can keep your taxable income low, allowing you to qualify for credits and deductions. Later, you can tap tax-deferred accounts when your income is lower.
If you have years before required minimum distributions (RMDs) begin, consider converting some traditional IRA funds to a Roth IRA. You'll pay taxes on the conversion, but future growth and withdrawals are tax-free. This can reduce RMDs and future taxes.
Use Deductions and Credits
Once you're 65 or older, you qualify for a higher standard deduction. You may also deduct medical expenses that exceed 7.5% of your adjusted gross income. If you're 70½ or older, you can make qualified charitable distributions from your IRA directly to charity, which counts toward your RMD and isn't included in your taxable income.
Many states offer additional tax breaks for retirees, such as exempting some or all of Social Security benefits or providing property tax relief. Check your state's rules.
- Take the higher standard deduction if you're 65+.
- Deduct medical expenses over 7.5% of AGI.
- Make qualified charitable distributions from your IRA.
- Consider Roth conversions in low-income years.
- Invest in tax-efficient funds in taxable accounts.
Common mistakes
- Withdrawing too much from tax-deferred accounts at once, pushing you into a higher bracket.
- Forgetting that up to 85% of Social Security benefits may be taxable.
- Overlooking state tax breaks for retirees.
