5 Ways to Cut Your Tax Bill in Retirement

Taxable income can interfere with the enjoyment of the retirement years. Retirees are faced with taxes on certain retirement accounts and Social Security benefits, but a few simple steps can help cut their tax bills.

They may find themselves in a higher tax bracket because of their retirement savings, so reducing taxable income becomes important. The good news is that retirees have more control over income from their retirement accounts and benefits.

Special: How to Live Like a Millionaire in Retirement, Spending OTHER PEOPLE’S Money!

Try these five ways to cut your tax bill during retirement:

1. Think about a Roth IRA — While money in a 401(k) or a traditional IRA isn’t taxed until you take it out, a Roth IRA has taxes on contributions but the funds can be taken out tax-free, the Fiscal Times explains. You can afford taxes during your working years, so that extra income without taxes will help in retirement.

2. Plan ahead for retirement withdrawals — Make withdrawals from tax-deferred retirement accounts early in retirement while in a lower tax bracket. You can begin making withdrawals from qualified accounts at age 59 1/2, and you must take required minimum distributions at age 70 1/2. Put the withdrawn money into taxable investment accounts or convert it into a Roth IRA. It will lower minimum distributions and result in reduced taxes in the future, the Fiscal Times notes.

3. Make charitable contributions through an IRA — Donations must be distributed directly to the charity from the account and can reduce adjusted gross income for lower taxes. The reduced income also lowers taxes on Social Security benefits and avoids high Medicare premiums, according to MarketWatch.

Special: The Bill-Paying Trick That Can Make You a Millionaire

4. Look into a reverse mortgage — Retirees get payments from reverse mortgages as long as their home remains their primary residence. The payments lower their IRA distributions to reduce taxes, MarketWatch reports. They can receive payments for the rest of their lives with the requirement that their home goes to the bank when they pass on.

5. Move to a state with low taxes — States such as Florida have no state income tax, which is part of the reason retirees move there (along with the warm climate), Time points out. However, retirees should research other financial factors of a particular state, such as homeowners’ insurance rates or sales taxes.

Tip: How to Turn $10,000 Into More Than $2 Million

• 4 Tax Advantages of Living in a Retirement Community
• 4 Tax Disadvantages of Living in a Retirement Community