Tax planning is one of the cornerstones of retirement planning. From maximising retirement account contributions to optimizing business deductions for side hustles, taking advantage of education tax credits and 529 plans, capital loss harvesting/ basis adjustments or choosing an advantageous retirement state – there are numerous strategies available to you in order to minimize taxes in retirement.
1. Focus on Long-Term Investments
Long-term investments may help lower your tax liability since they tend to attract lower capital gains rates and tax loss harvesting can help decrease investment taxes while simultaneously improving long-term returns.
Utilizing tax-advantaged retirement accounts is one of the best ways to lower your taxable income. By contributing to traditional and Roth IRAs, you can both decrease your current tax bill while taking advantage of potentially tax-free growth over time.
Contributing to multiple account types – such as taxable brokerage accounts and tax-advantaged retirement accounts like IRAs and 401(k)s – in order to minimize taxable income is also beneficial – this strategy may prove especially helpful if your expected tax rate will increase during retirement compared with now.
2. Optimize Your Business Deductions
Tax management in retirement requires careful planning and strategic decision-making. From managing taxable accounts, Roth IRAs and tax-deferred retirement accounts, understanding how each account should be treated when withdrawing funds could have a dramatic effect on your overall federal tax liability.
Maximizing retirement account contributions, using HSAs and FSAs, optimizing business deductions for side hustles, taking advantage of education tax credits and 529 Plans, strategically donating to charities using donor-advised funds, choosing an appropriate retirement state, capital loss harvesting and basis adjustments, developing a withdrawal strategy tailored specifically to your account, staying informed on state/local tax breaks are all key ways of minimizing taxes in retirement. Partner with a financial and tax professional for help creating a personalized plan tailored just for your situation!
3. Don’t Forget About Charitable Donations
An effective financial plan during your working years, including taking advantage of tax-advantaged retirement accounts and planning withdrawals post-retirement, can significantly decrease taxes paid. Furthermore, charitable donations made using donor advised funds may provide valuable tax deductions.
Investment in tax-free bonds may help lower your overall tax liability, particularly when combined with other tax-smart strategies like using tax loss harvesting or basis adjustments and selecting suitable retirement states. Furthermore, charitable trusts like charitable remainder or lead trusts can help decrease both during life and after death.
Remember that every dollar spent on taxes could have gone toward supporting your lifestyle or investments. Working closely with both a financial advisor and tax professional to create an approach for minimizing taxes in retirement will allow you to achieve the lifestyle you seek.
4. Invest in Tax-Free Bonds
Tax planning can help reduce long-term taxable income. For instance, hourly employees facing high tax working years might take advantage of employer-sponsored retirement plans to defer compensation into lower tax years, such as retirement.
Utilizing education tax credits and 529 Plans can also help offset educational expenses, further reducing taxable liability. Furthermore, donating appreciated stock through donor-advised funds can lower taxable income while eliminating capital gains taxes.
Investment in both tax-exempt and taxable bonds can help you manage your taxable liability during retirement, helping avoid “sequence risk”, the fear that investing during a period when markets are rising will force you to sell during a decline, incurring capital gains taxes.
5. Take Advantage of Capital Loss Harvesting
As you near retirement, it is crucial that you understand how different sources of income will be taxed. According to Greenberg, “the key is keeping taxable income low enough that it doesn’t move into higher tax brackets,” which requires using non-tax deferred accounts first for income investments before transitioning to taxable accounts as needed.
Capital loss harvesting can help lower your taxable income by selling weaker-performing investments from your portfolio to offset gains from stronger-performing ones. It is particularly useful after market corrections or steep decreases. Always consult an advisor and tax professional when your circumstances change as they will be able to help adapt your strategy appropriately.