July 24


Retire Richer: How to Lower Taxes in Retirement

By Harrison O'Reill

July 24, 2023

Retirement is a time when many people expect to enjoy the fruits of their labor, but the high taxes that come with it can be a major burden. Fortunately, there are several strategies that can help retirees lower their taxes and keep more of their hard-earned money.

What are the strategies in question? Keep on reading to find out!

Understanding Retirement Accounts

When choosing a retirement account, it’s important to consider your current tax situation, as well as your expected tax situation in retirement. If you expect to be in a higher tax bracket in retirement, a Roth IRA or Roth 401(k) may be the better choice.

If you expect to be in a lower tax bracket in retirement, a traditional IRA or 401(k) may be the better choice. It’s important to consult with a financial advisor to determine the best option for your individual situation.

Traditional vs. Roth IRAs

When it comes to retirement accounts, one of the most important decisions you’ll make is whether to contribute to a traditional IRA or a Roth IRA. The main difference between the two is when you pay taxes on the money you contribute.

With a traditional IRA, you’ll pay taxes on the money when you withdraw it in retirement. With a Roth IRA, you pay taxes on the money upfront, but then you can withdraw the money tax-free in retirement.

401(k) Plans

Another popular retirement account is the 401(k) plan. These plans are offered by employers and allow you to contribute a portion of your pre-tax income to the plan.

The money grows tax-free until you withdraw it in retirement, at which point you’ll pay taxes on the money. Some employers also offer a Roth 401(k) option, which works similarly to a Roth IRA.


In addition to traditional and Roth IRAs, there are also traditional and Roth 401(k) plans. Traditional IRAs and 401(k) plans allow you to contribute pre-tax income, which lowers your taxable income for the year.

Roth IRAs and 401(k) plans, on the other hand, require you to pay taxes on the money upfront, but then you can withdraw the money tax-free in retirement.

Required Minimum Distributions

Required Minimum Distributions (RMDs) are the minimum amount of money that retirees must withdraw from their retirement accounts each year. These accounts include traditional IRAs, 401(k)s, and other employer-sponsored retirement plans.

The purpose of RMDs is to ensure that retirees do not keep their retirement savings in tax-deferred accounts indefinitely and eventually pay taxes on their savings.

RMD Rules

RMDs must begin by April 1 of the year after the account owner turns 72 years old. The amount of the RMD is determined by dividing the account balance by the account owner’s life expectancy.

Failure to take the RMD results in a penalty of 50% of the amount not withdrawn. However, there are some exceptions to the RMD rule, such as for those who are still working and have not yet retired.

RMD Strategies

One RMD strategy is to withdraw more than the minimum required amount, which can help reduce the account balance and, therefore, lower future RMDs.


Another strategy is to convert traditional IRA funds to a Roth IRA, which eliminates the need for RMDs and can provide tax-free income in retirement. It is important to consider all options and consult with a financial advisor before making any decisions regarding RMDs.

Tax Considerations

To lower your tax, here are some considerations you need to consider.

Tax-Deferred vs. Tax-Free

When planning for retirement, it’s important to consider the tax implications of your investment accounts. Tax-deferred accounts, such as traditional IRAs and 401(k)s, allow you to delay paying taxes on your contributions and earnings until you withdraw the money in retirement.

Tax-free accounts, such as Roth IRAs and Roth 401(k)s, allow you to contribute after-tax dollars and withdraw the money tax-free in retirement. Consider your current tax bracket and future tax situation when deciding which type of account to invest in.

Tax-Efficient Retirement

To lower your taxes in retirement, have a tax-efficient retirement plan. This means having a mix of tax-deferred and tax-free accounts, as well as taxable accounts.

By withdrawing money from different types of accounts strategically, you can minimize your tax liability. Additionally, consider investing in tax-efficient funds, which are designed to minimize the tax impact of your investments.

Tax Brackets

Understanding your tax bracket is crucial when planning for retirement. Your tax bracket determines the percentage of your income that you’ll owe in taxes.

By managing your income and deductions, you can potentially lower your tax bracket and pay less in taxes. Additionally, consider the impact of Required Minimum Distributions (RMDs) on your tax bracket in retirement.

Taxes in Retirement

In retirement, you’ll still owe taxes on your income, including retirement income. This includes Social Security benefits, pension income, and withdrawals from tax-deferred accounts. Consider the impact of taxes on your retirement income when planning your retirement budget.

Taxable vs. Tax-Free Income

When deciding how to generate retirement income, consider the tax implications of different types of income. Taxable income, such as interest and dividends from investments, is subject to taxes.

Tax-free income, such as municipal bond interest and Roth IRA withdrawals, is not subject to federal income taxes. By strategically generating both types of income, you can potentially lower your tax liability.

Tax-Friendly States

Consider retiring in a tax-friendly state to potentially lower your tax burden in retirement. Some states have no income tax, while others have lower tax rates for retirees.

Additionally, some states offer tax breaks for retirement income and Social Security benefits. Research the tax laws in potential retirement destinations to determine which state is the most tax-friendly for your situation.

Investment Strategies

By using a combination of these investment strategies, you can lower your taxes in retirement and achieve your financial goals. Consider working with a financial advisor to develop a personalized investment plan that’s tailored to your needs and risk tolerance.

Investment Options

One of the most important things to consider when planning for retirement is your investment strategy. Investing in a mix of stocks, bonds, and mutual funds can help you achieve your financial goals while minimizing your taxes.


Consider diversifying your portfolio by investing in a range of assets, such as large-cap stocks, small-cap stocks, international stocks, and bonds.

Municipal Bonds

Municipal bonds are a great investment option for retirees who want to lower their taxes. These bonds are issued by state and local governments and are exempt from federal taxes. They can also be exempt from state and local taxes, depending on where you live.

Municipal bonds are generally considered to be lower-risk investments than stocks, which makes them a good option for retirees who want to preserve their capital.

Capital Gains

Capital gains are profits that you make on the sale of an asset, such as stocks or real estate. In retirement, it’s important to manage your capital gains to minimize your taxes.

One strategy is to hold onto your investments for at least a year and a day, which will qualify them for long-term capital gains. Long-term capital gains are taxed at a lower rate than short-term capital gains.

Short-Term vs. Long-Term Gains

Short-term capital gains are profits that you make on the sale of an asset that you’ve held for less than a year. These gains are taxed at your ordinary income tax rate, which can be as high as 37%.

Long-term capital gains, on the other hand, are taxed at a lower rate, which can be as low as 0% for those in the lowest tax bracket.

Cash Value

Another investment option to consider is cash-value life insurance. This type of insurance policy allows you to build up cash value over time, which can be used to pay for your retirement expenses.

Cash value life insurance policies are tax-deferred, which means that you don’t have to pay taxes on the earnings until you withdraw them.

Social Security Benefits

Social Security benefits can be a valuable source of income in retirement, but it’s important to make informed decisions about when and how to claim them. By understanding the rules and strategies for maximizing your benefits, you can lower your taxes and increase your retirement income.

When to Claim

One of the most important decisions to make regarding Social Security benefits is when to claim them. You can start receiving benefits as early as age 62, but the longer you wait, the higher your monthly benefit will be.

If you can afford to wait until your full retirement age (between 66 and 67, depending on your birth year), you’ll receive your full benefit amount. And if you can wait even longer, until age 70, your benefit amount will increase by 8% per year.

Maximizing Benefits

To maximize your Social Security benefits, understand how your benefit amount is calculated. Your benefit is based on your highest 35 years of earnings, adjusted for inflation. If you haven’t worked for 35 years, zeros will be factored in, which can lower your benefit.

To increase your benefit amount, you can work longer and earn more, or you can delay claiming your benefits.

Social Security Strategies

There are several strategies you can use to maximize your Social Security benefits. One popular strategy is called “file and suspend,” which allows one spouse to claim their benefit while the other spouse delays claiming theirs. This can result in a higher overall benefit amount for the couple. Another strategy is called “restricted application,” which allows one spouse to claim a spousal benefit while delaying their own benefit until it reaches its maximum amount.

Other Retirement Planning Considerations

In conclusion, retirement planning involves several considerations, including retirement age, financial advisors, sales tax, the Secure Act, the Covid-19 pandemic, and potential changes to tax laws.

Consider working with a financial advisor to create a customized retirement plan that aligns with your goals and risk tolerance.

Retirement Age

One of the most critical factors in retirement planning is determining the right age to retire. The earlier you retire, the longer your retirement savings will have to last. However, if you retire too early, you may not have accumulated enough savings to sustain your lifestyle.

Retiring at a later age can help you maximize your Social Security benefits and potentially increase your retirement income. Consider your financial situation, health, and personal goals when deciding on your retirement age.

Financial Advisors

A financial advisor can provide valuable guidance on retirement planning, including tax-efficient strategies to reduce your tax burden. Look for a qualified financial advisor who specializes in retirement planning and has experience working with clients in similar financial situations.

They can help you create a customized retirement plan that aligns with your goals and risk tolerance.

Sales Tax

Sales tax can add up and significantly impact your retirement budget. Consider relocating to a state with no sales tax or a lower sales tax rate to reduce your expenses.

Additionally, be mindful of the sales tax rate when making large purchases, such as a new car or home appliances, as these can add up and increase your tax burden.

Secure Act

The Secure Act passed in 2019, made several changes to retirement planning rules. One significant change is the increase in the age for required minimum distributions (RMDs) from 70 1/2 to 72. Additionally, the Secure Act allows long-term, part-time employees to participate in 401(k) plans, making it easier for more individuals to save for retirement.


In conclusion, lowering taxes in retirement is a critical step in achieving financial stability. With careful planning and the right strategies, retirees can significantly reduce their tax burden and maximize their retirement income. Here are some key takeaways to keep in mind.

Diversify your retirement income sources. By having a mix of taxable and tax-free income, you can reduce your overall tax liability and avoid putting all your eggs in one basket.

Take advantage of tax-efficient investments. Consider investing in tax-free municipal bonds, Roth IRAs, or other tax-advantaged accounts to minimize your taxes in retirement.

Be strategic about withdrawals. Plan your withdrawals carefully to minimize taxes and avoid penalties. For example, consider taking advantage of the tax-free withdrawals from a Roth IRA before tapping into your traditional IRA or 401(k).

Stay informed about tax law changes. Tax laws are constantly changing, so it’s essential to stay up-to-date on the latest rules and regulations that could impact your retirement taxes.

By following these tips, retirees can lower their taxes in retirement and achieve greater financial security. Remember, every dollar saved in taxes is a dollar that can be used to fund your retirement lifestyle.

Frequently Asked Questions

Here are some common questions about this topic.

How can I lower my taxes in retirement?

One of the best ways to lower your taxes in retirement is to take advantage of tax-advantaged retirement accounts, such as traditional IRAs, 401(k)s, and Roth IRAs. These accounts allow you to save for retirement while reducing your taxable income. Additionally, you can consider moving to a state with lower income or property taxes or taking advantage of deductions for medical expenses or charitable donations.

What is a Required Minimum Distribution (RMD), and how can I avoid it?

An RMD is the minimum amount that you must withdraw from your tax-deferred retirement accounts once you reach age 72 (or 70.5 if you were born before July 1, 1949). To avoid RMDs, you can consider converting some of your traditional IRA or 401(k) funds to a Roth IRA, which is not subject to RMDs. Additionally, you can donate your RMD to charity, which can help reduce your taxable income.

Can I still contribute to a retirement account after I retire?

Yes, you can still contribute to a traditional IRA or a Roth IRA after you retire, as long as you have earned income. Additionally, if you are self-employed, you can contribute to a solo 401(k) or a SEP IRA. However, you cannot contribute to a 401(k) plan after you retire unless you are still working for the employer who sponsors the plan.

Are there any tax credits available for retirees?

Yes, there are several tax credits available for retirees, including the Retirement Savings Contributions Credit (also known as the Saver’s Credit), the Credit for the Elderly or Disabled, and the Earned Income Tax Credit (EITC). These credits can help reduce your tax bill or increase your refund, so it’s worth exploring whether you qualify for any of them.

Should I hire a tax professional to help me with my retirement taxes?

It depends on your individual situation. If you have a simple tax situation and feel comfortable doing your taxes on your own, you may not need to hire a tax professional. However, if you have complex investments, multiple sources of income, or other complicated tax issues, it may be worth hiring a tax professional to help you navigate the tax code and maximize your tax savings.

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