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  • Mike Komara

7 Tax-Smart Strategies for Retirement

Updated: Jun 5

Saving for retirement is an important goal. Smart tax planning can help you grow your savings faster and keep more of your savings for retirement. Here are seven tax strategies to consider that might save taxes for you or your family.


If you're in a high income tax bracket, consider contributing to a Roth IRA. With a Roth IRA, you contribute after-tax dollars, but all future withdrawals are tax-free. This can be a great way to grow your retirement savings tax-free.


If you're close to retirement age, it may make sense to convert some of your traditional IRA assets to a Roth IRA. This can help you reduce your taxable income in retirement. Be sure to talk with a financial advisor before doing any conversions, as there may be taxes owed on the conversion itself.


While social security benefits are taxable, the amount of tax you pay depends on your income level. If you have other sources of retirement income (such as a pension or an IRA), your social security benefits will be taxed at a higher rate. However, if you rely solely on social security for retirement income, your benefits will be taxed at a lower rate. In addition, the amount of tax you pay on social security benefits also depends on your overall income tax liability.


If you are in a lower tax bracket, you will pay less in taxes on your social security benefits than if you are in a higher tax bracket. As a result, it is important to consider all of these factors when determining how much tax you will owe on your social security benefits.



1. Max Out Your IRA

One smart tax strategy is to make the maximum contribution to your IRA. The IRS sets the maximum each year; in 2022, the maximum is $6,000 for people under 50 and $7,000 for those older than 50. You must have earnings from a job to make contributions, and your contributions can't exceed the amount you earn.


If you're self-employed or own a small business, you can establish and contribute to a Simplified Employee Pension IRA (SEP-IRA), which allows for more significant contributions than a 401(k). A small business owner can contribute up to $61,000 to a SEP in 2022. If your business employs others, the SEP-IRA will have to cover them, as well.


For many people, retirement planning is a multi-faceted puzzle. In addition to saving as much money as possible, it's also important to consider how you will generate income during retirement. For some, this may mean working part-time or starting a small business. For others, it may mean relying on investment income. Regardless of your retirement plan, maxing out your IRA is a smart move. Not only will you have more money to work with in retirement, but you'll also enjoy tax benefits and potentially higher social security benefits.


With so much riding on a successful retirement, it's worth taking every opportunity to make your nest egg as large as possible. Maxing out your IRA is one of the best ways to do just that.

2. Tax-deferred Accounts

A tax-deferred account is an investment account in which you are not required to pay taxes on the earnings from your investments until you withdraw the money. This type of account can be a great way to boost your retirement income, since you will not have to pay taxes on the money until you retire. Additionally, since the money in your account will grow tax-deferred, you will have more money available to reinvest and compound over time.


When you do start withdrawing money from your account in retirement, you may be in a lower tax bracket than you are now, which could result in significant savings. While there are some caveats to be aware of (e.g., early withdrawal penalties), a tax-deferred account can be a powerful tool to help you maximize your income.


Contributions made to tax-deferred accounts and their gains are not taxed until you withdraw the money at retirement. Since income is likely to be lower in retirement than in working years, many people will save taxes using tax-deferred accounts. Traditional IRAs are one example, but 401(k)s and 403 (b)s are other examples of tax-deferred accounts.



3. Consider a Roth IRA Conversion

A Roth IRA conversion can be a great way to boost your retirement income. By converting a traditional IRA to a Roth, you can grow your retirement savings tax-free. This can be especially beneficial if you anticipate being in a higher tax bracket in retirement. In addition, unlike traditional IRAs, Roth IRA funds are not subject to required minimum distributions. This means that you can leave your Roth IRA to your heirs, and they will not have to pay taxes on the distributions. Finally, if you are receiving social security benefits, a Roth IRA conversion can help you keep more of your benefits by keeping your overall income lower. For all these reasons, a Roth IRA conversion is definitely worth considering.


Roth IRAs differ from traditional IRAs because your contributions are taxed upfront; only your gains are taxed when you withdraw the money. Only people who make less than a certain threshold can contribute to Roth IRAs. The IRS establishes the threshold annually; in 2022, it is $129,000 for single taxpayers and $204,000 for married taxpayers.


Even if your income exceeds the threshold to contribute directly to a Roth IRA, you may be able to convert a traditional IRA into a Roth. Converting is a good tax strategy if you don't expect to need the money during your lifetime and want to leave it to your children. Otherwise, leaving a traditional IRA to your children would subject them to taxes when they take distributions.


4. Municipal Bonds and Funds

For many people, retirement planning is a top priority. And rightfully so - retirement can last 20 or 30 years, and it's important to have a solid plan in place to ensure a comfortable lifestyle. For some, that income will come from social security benefits and pensions. Others, however, will need to supplement those income sources with other investments. Municipal bonds and funds can be an excellent income strategy for many investors.


Municipal bonds are debt securities issued by state and local governments to finance various public projects. They are typically exempt from federal income tax, and in some cases, state and local taxes as well. This makes them an attractive option for retirees who are looking to minimize their tax burden. In addition, many municipal bonds offer relatively high interest rates, which can provide a nice boost to income.


Municipal funds are mutual funds that invest in a variety of municipal bonds. These funds can offer diversification and professional management, making them a good option for retirees who want a hands-off approach to investing. And like individual municipal bonds, municipal fund dividends are typically exempt from federal income tax.


For retirees who are looking for ways to increase their income, municipal bonds and funds can be an attractive option. Unlike traditional bonds, which are subject to federal income tax, municipal bonds are exempt from income tax. This makes them an especially attractive option for retirees who are in a higher tax bracket. In addition, because municipal bonds are backed by the full faith and credit of the issuing municipality, they tend to be relatively safe investments. For retirees who are concerned about preserving their capital, this can be an important consideration.


Finally, many municipal bond funds offer investors the ability to receive monthly distributions, which can help supplement income from social security benefits or other sources. For all these reasons, municipal bonds and funds can be an attractive income planning tool for retirees.



5. Give Your Distribution to Charity

One way to lower retirement taxes is to give your distributions to charity. When you retire, you will likely have several sources of income, including pensions, investment income, and social security benefits. If you are not careful, these sources of income can push you into a higher income tax bracket.


However, if you give some of your income to charity, you can lower your overall tax burden. In addition to lowering your retirement taxes, giving to charity can also help you reduce your estate taxes. By giving money to charity now, you can lower the value of your estate and thus reduce the amount of income taxes your heirs will owe when you die. As a result, giving to charity is a win-win proposition: it can help you lower your income taxes while also benefiting a worthy cause.


In many cases, the rules allow individuals 70 1/2 or older to make a Qualified Charitable Distribution (QCD) of up to $100,000 directly from their IRAs. Contributing directly from the IRA will save income taxes.


To qualify as a QCD, you must donate directly from the IRA to an eligible charity. Work with your Solas Wealth adviser to be sure the charity qualifies. Also, be sure to list the QCD properly on your tax return.


6. Consider a Smart Gift With Your Distribution

As you approach retirement, it's important to think about how you will distribute your assets. One smart way to do this is to consider giving a income gift. This type of gift can help you reduce your taxable income, which can in turn increase your social security benefits and lower your overall retirement costs. Additionally, a income gift can help you ensure that your loved ones are taken care of after you're gone. When you make the decision to give a retirement income gift, you can rest assured knowing that you're making a wise choice for your financial future.


To avoid stiff penalties, you generally must take a required minimum distribution (RMD) from your traditional IRA each year after your turn 72, or, in some cases, 70 1/2. The exact RMD required varies yearly and depends on life expectancy tables. You can use that distribution (or any distribution) to help fund a 529 college education plan for a family member. You'll still have to pay income taxes on the distribution, but generally, the 529 funds will grow tax-free.



7. Consult with a Wealth Adviser

When it comes to retirement planning, one of the most important considerations is taxes. With careful planning, it is possible to lower the amount of taxes you will owe on your income. However, the tax laws are complex and constantly changing, so it is best to consult with a wealth adviser who has experience with retirement tax planning. They can help you maximize your social security benefits and minimize your income tax liability. As a result, you can keep more of your hard-earned money in retirement.


The best tax strategy varies based on the individual's situation and goals. Solas Wealth can help you develop an individualized tax strategy to help you save for retirement and to protect your savings from undue taxation. Connect with us online, and we'll schedule a time to talk with you about your retirement tax strategy.

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