TAXES IN RETIREMENT Your retirement years are meant to be enjoyed. These six strategies can help you reduce your tax burden once you have retired. By Eric Shattuck
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axes are an inescapable fact of life, and for those who are preparing to retire or have already left the workforce, those taxes can put a painful dent in their retirement income. Fortunately, there are a number of ways to trim your taxes and keep more of your hardearned money in your pocket, whether retirement is years away or you are already enjoying your golden years. Contribute to a Roth IRA Contributing to a Roth IRA ahead of your retirement is one of the simplest and most effective ways to reduce your tax burden. Unlike a traditional IRA or 401(k), the money you put into a Roth IRA is taxed before contribution, in exchange for coming out tax-free during retirement. Because you are likely in a lower tax bracket when you are just starting to save for retirement, paying taxes at that time, instead of after you retire, can save you thousands of dollars. While most people will be very well served by investing early in a Roth IRA, there is one major exception. If your employer provides matching 401(k) contributions, you should always aim to contribute the maximum amount they will match before investing the rest in an IRA.
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Central Florida Lifestyle | February 2021
Open a Health Savings Account If you have a high-deductible health insurance plan, opening a health savings account, or HSA, is one of the smartest post-retirement financial moves you can make. In an HSA, money is contributed pre-tax, enjoys taxdeferred growth and can be withdrawn tax-free as long as the money is spent on qualifying health care. Since medical costs make up a large portion of most retirees’ budgets — even for people in excellent health — opening an HSA is virtually guaranteed to trim your tax bill. Reduce Your Expenses Because money taken out from most retirement fund sources, such as traditional IRAs and 401(k)s, is taxed upon withdrawal, cutting down on your expenses after retirement is a sure-fire way to cut your taxes as well. If possible, create a financial planning strategy that involves paying off your mortgage before you retire. Getting rid of your largest monthly expense significantly cuts down on how much you need to withdraw from your retirement fund. Additionally, since you are likely to be paying off principal on your mortgage rather than interest by the time you retire, the mortgage interest deduction isn’t nearly as beneficial.
