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3 ways to save money on tax in retirement – The Motley Fool



You have worked hard throughout your career to save on retirement, so of course you will get the most out of your money. However, when planning retirement, many do not consider how taxes will affect their savings.

If you save in a 401 (k) or traditional IRA, your dollars are deductible in front. But you have to pay income tax on the payments when you retire. If you are already stretched thinly financially during retirement, you can make your golden years even more challenging to give a good deal of your savings to Uncle Sam.

Fortunately, by making some smart and strategic decisions, there are a few ways to save on taxes at retirement.

  A 1040 IRS tax form with a calculator and pen on top of it.

Image Source: Getty Images.

first Understanding Your Tax Console

Exactly how much income tax you pay on your retirement account distributions depends on which tax console you fall into. By making withdrawals strategically from your 401 (k) or traditional IRA, you can ensure that you do not pay more than you have to pay.

Tax rate For Unmarried Persons, Taxable Income Over: For Married Families Submitting Common, Taxable Income Over:
10% $ 0 $ 0
12% $ 9,700 $ 19,400
22% $ 39,475 $ 78,950
] 24% [19659012] $ 84,200 [19659012] $ 168,400 [19659014] 32% [19659012] 160,725 [19659012] $ 321,450 [19659014] 35% [19659012] $ 204,100 [19659012] $ 408,200 [19659014] 37% [19659012] $ 510,300 [19659012] $ 612,350

Data Source: IRS.

So, for example, you are married and the two of you expect to spend about $ 80,000 a year in retirement. If you pull exactly $ 80,000 from your retirement account, you will fall into a higher tax bracket than if you could make the ends meet only $ 78,950 or less a year.

Remember also that these brackets account for all taxable pension income – which may include social benefits. Just how much you pay in taxes on your social security benefits depends on a number of factors, but the bottom line is that your additional retirement income may potentially push you into a higher tax bracket. Taking all other sources of pension income into account, you must deduct your pension savings accordingly, so you can stay within your ideal tax bracket.

2nd Investing in a Roth IRA

All forms of retirement account have their advantages and disadvantages, and one of the greatest benefits of investing in a Roth IRA is that you can withdraw your money tax-exempt. Because your contributions are taxable in front of you when you make money in the account, you do not owe any tax after you make payments.

A Roth IRA is particularly useful if you have to stretch every dollar in retirement because the money in your account is the amount you will actually be able to spend. In other words, what you see is what you get. Even if you do not get the upward tax cut when you make the original contributions as you would with a 401 (k) or traditional IRA, you will save money when you need it most during retirement.

Another benefit of the Roth IRA is that you do not have to start taking required minimum distributions (RMD & # 39; s). With a traditional IRA or 401 (k) you must first start to withdraw money from your account, whether you want to or not (because you haven't paid tax on that money yet the government wants its share in the end). This can be problematic if you plan to continue working beyond this age because you may want to keep your money in your retirement fund until you actually need it so it can continue to grow as long as possible. With a Roth IRA there are no RMDs so you can keep all the money in your account for the rest of your life if you choose.

If you have decided that a Roth IRA is the right step for you, then it is possible to convert a traditional IRA to a Roth IRA – but be sure to balance the pros and cons first. When you convert to a Roth IRA, you can't change your mind and undo the decision, so make sure it's a smart move before you pull the trigger.

3rd Consider moving to a more tax-friendly state

Sometimes, the place you call home can give a tax credit just by staying there. There are seven states in the United States that do not have state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Also New Hampshire and Tennessee do not tax your earnings or other forms of income – just income and interest income. So if you live in any of these nine states, you may not have to pay much (or anything) in the state's income tax.

Remember, however, that you still have to pay federal income taxes on distributions from your 401 (k) or traditional IRA, so you can't avoid taxes altogether. But depending on how much you earn in retirement income and what your savings are, you can save a lot on a thousand dollars a year on state taxes.

Before unpacking and moving, consider all the economic benefits and disadvantages of moving to a new state. You can save a large sum of money on tax every year, but if house prices and general living costs are higher, you can't get out of business financially. That said, if you do your research and decide that you can save money by moving to a more tax-friendly area, you may be living a much more comfortable and enjoyable retirement.

To some extent, taxes will always be inevitable. But that doesn't mean you can't be strategic about your pension decisions to save money. By considering how taxes will affect your retirement income and adjust your retirement plans accordingly, you can save money and make the most of every penny.


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