Retirement Investing Strategies and Articles, Tax Planning Ideas and Tax Updates

Four Ways to Maximize Your Retirement Income and Minimize Your Tax Bill

by Alli Thomas

Aug 11, 2022

Because taxes are one of the few certainties in life, tax planning is one of the biggest benefits of retirement planning. With proper planning, you can increase the amount of money you have in retirement not only by maximizing your potential income, but also by minimizing your tax bill. Here are some ideas to help you get started:

Take Advantage of All Three Tax “Buckets.”

The accounts your retirement savings can be in fall into three distinct buckets: tax-deferred, taxable, and tax-free.

  • Tax-deferred: includes traditional 401(k) accounts or IRAs. You made pretax contributions to these accounts, and you’ll have to pay taxes on both the contributions themselves plus any earnings when you withdraw upon retiring.
  • Taxable: includes plain old savings or brokerage accounts. You made after-tax contributions to these accounts, but you’ll have to pay taxes on any interest, dividends and capital gains at the time of withdrawal.
  • Tax-free: includes Roth 401(k) accounts and Roth IRAs. You made after-tax contributions to these accounts, but in most cases, both the contributions and earnings may be withdrawn tax-free when you retire.

The benefit of having your savings distributed among each of the three buckets is that you have more control over your retirement income. Subsequently, planning your withdrawals in advance could reduce your tax burden since you’d be able to make it from the most tax-optimal account.

Perform Roth IRA Backdoor Conversions

Roth IRAs are great savings vehicles, but one roadblock that high earners face are the income restrictions on making direct contributions to a Roth IRA (in 2022, these start at $129,000 for single filers and $204,000 for those married filing jointly). 

Luckily, high earners can still take advantage of the tax-free growth that Roth IRAs offer by converting a traditional IRA to a Roth IRA via a back-door conversion. You will have to pay taxes on the amount converted, but once your money is in the Roth IRA, earnings will grow tax-free. Keep in mind there are a few important caveats for these transactions, such as a possible bump in your tax bracket in the conversion year and potentially higher Medicare premiums.

Read more: When Should You Perform a Roth IRA Conversion?


Plot Your RMD strategy

At first glance, taking the annual required minimum distribution (RMD) once you reach age 72 may seem to be a straightforward process. But you may face negative tax consequences if you don’t plan carefully.

While we’re on the subject of RMDs, one possible way to minimize their tax impact is by making a qualified charitable distribution (QCD). A QCD reduces your adjusted gross income, which may also lower the taxes you pay on Social Security benefits and decrease your Medicare premium.

Explore Health Savings Accounts (HSAs)

Healthcare is a major expense for retirees. If you have a high-deductible health insurance plan, you may want to consider opening a health savings account (HSA) to pay for qualified medical expenses in your golden years.

HSA contributions can be either pretax or tax-deductible. The contributions grow tax-free (in most cases) and may be withdrawn with no tax consequences if applied to IRS-qualified medical expenses.

Looking for more ideas to save on your tax bill in retirement? Our financial advisors can help. Request a complimentary, no-obligation conversation today!

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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