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5 Tips For Managing Taxes During Retirement

Many people incorrectly assume that taxes get a lot easier after you retire. Although this may be true for some taxpayers, others may find that dealing with Social Security, investments, and retirement withdrawals make things a bit more complicated. That’s why it’s important to develop a strategy and be prepared. If you’re retired or will be soon, consider these five tips for managing taxes during retirement.

1. Pay Attention to The RMD Rules

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) made major changes to the Required Minimum Distribution (RMD) rules. Once you reach the age of 72, you must take your first RMD by April 1 of the following year. RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS establishes. If you fail to take your distribution on time, however, and wind up with a double disbursement, you’ll be taxed at a higher rate. Be sure to pay close attention to when and how much you must withdraw.

2. Diversify Your Retirement Income

It’s important to build a plan that includes both taxable and non-taxable retirement income. Roth conversions, municipal bonds, permanent life insurance, IRA distributions, and other investments should all be considered as part of a healthy mix. Diversification not only helps you manage your taxable income, but can also ensure you have a steady stream of income regardless of inflation or market volatility.

3. Add a Roth IRA to The Mix

Before you retire, consider adding a Roth IRA to your retirement portfolio. Since Roth accounts are not funded with pre-tax dollars, you can take withdrawals during retirement without adding to your taxable income. If you already have a traditional IRA, think about converting to a Roth so you can take advantage of tax-free withdrawals in the future.

4. Delay Retirement Withdrawals

If you’ve reached retirement age and are eligible to take withdrawals from your retirement accounts, consider waiting a little longer if possible. Not only will your account continue to grow, but you won’t be paying at a higher tax rate. Once you reach 72, however, you’re required to take minimum distributions. 

5. Donate to Charity

As discussed previously, you must make RMDs once you reach 72. One way to reduce the amount (and your taxes) is to make qualified charitable distributions (QCD). A QCD allows you to direct up to $100,000 tax-free directly from your IRA to a qualified charity. That amount is then applied directly to your RMDs. Since the money is being donated to charity, it’s not included in your income. It is important to note that this type of donation is excluded from being treated as a regular charitable deduction.

Don’t Forget State Taxes, Too!

Although it’s very important to plan for federal taxes, don’t forget to check into your state tax responsibilities too. Depending on where you live, you could be responsible for income tax, as well as other state and local taxes. We strongly recommend working with a financial adviser or tax professional to make sure you are fully prepared to meet your tax liabilities during your retirement.