Tax Tips for Retired PersonsPublished:
Special Tax Considerations for When You Retire
Many people believe that once they retire, they will pay less in taxes due to a lower income. While that may be true for some people, it is not always the case.
Depending on what income you have coming in (e.g., from Social Security, retirement accounts, or other investments), you may be paying a larger portion of taxes than you did when you were still working. However, there are ways to reduce your tax obligation while in retirement, allowing you to keep more of the income you need to live out your golden years.
Here are 4 useful tax tips for retired persons:
Manage Your Adjusted Gross Income (AGI)
It is important to manage your total amount of Adjusted Gross Income (AGI) while in retirement. Your AGI determines what tax bracket you are placed in, whether you will be required to pay taxes on your Social Security benefits, and how much you will pay for Medicare premiums. With a lower AGI, you can keep a greater portion of your retirement income for yourself. In some cases, you may actually retain more money by having less income.
Keep Your Expenses Low
Retirement is a good time to downsize and reevaluate your recurring monthly expenses. The less income you need to pull from various investments, the lower you can keep your AGI for tax purposes. Before entering retirement, it is a good idea to pay down (or pay off) all of your major debits – such as mortgages, credit cards, and auto loans. During retirement, you should make an effort to keep your debts low, unless using credit for a major purchase has a certain tax benefit.
Understand Your IRAs
Most people have at least one retirement account that they plan on using for their retirement. To get the most benefit from this saved money, you need to know how accessing this money will be taxed. Traditional IRA distributions are taxed as income, while Roth IRAs are considered non-taxable. It may benefit you to diversify your retirement portfolio and limit the amounts you withdraw from different accounts in order to keep your total taxable income lower. You should consider consulting a tax professional about your retirement income and strategies for keeping your tax liability at a minimum.
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Consider Your Income Sources
Keep in mind that using money you have in a bank account or selling certain assets could give you access to income that will not affect your AGI. In many cases, a retired person will use an IRA exclusively for their living expenses, costing them thousands in tax dollars, when they have money available in a bank account or other assets. Simply diversifying where and when you pull from different assets can have a large impact on your tax liability.
Managing your taxes in retirement can be confusing. Unfortunately, many people end up paying much more than they should due to the complexity of the U.S. tax code. It is recommended that you discuss your retirement income with a tax professional who can help you find the best strategy for keeping more of your money.