(630) 948.3330 info@lenityfinancial.com

4 Ways to Manage Taxes in Retirement

Think you’ll pay less in taxes during retirement?

Careful, it’s not always the case. If you haven’t planned your spending and income sources right, you just might have an unexpectedly high tax bill. A little planning can help you manage taxes in retirement.

So what can you consider today to help you tomorrow? You can’t know for sure what the tax rates will be in your next phase. But a little knowledge about historical tax rates might help you to better understand today’s rates. And this knowledge is important so you can make a more informed decision for tomorrow.

If you google the historical top marginal tax rates, it will become clear that today’s rates are near the historical lows. In fact, in years like 1944, the top marginal tax rate peaked over 90%-yikes! Juxtapose those rates to the 2020 top marginal tax rate of 37%. Now you can see how today’s rates might be considered low. What else should you consider in addition to tax rates potentially changing?

Well, there are a few important changes that occur for most at retirement. And those changes could potentially cause the tax bill to be higher.

  • Mortgage interest deduction is small or non-existent.
  • Children are grown so the exemptions or credits for kids are gone.
  • Checks you’re writing in retirement are typically smaller so charitable deductions may be less.

The Loss of deductions is an important change to be aware of, but did you realize that your Social Security check can be taxed?

The IRS tracks something called provisional income to determine the percentage of your Social Security that will be taxed. Here are a few common sources of provisional income (not all are listed here):

  • Distributions taken out of your Traditional IRAs, 401Ks, etc.
  • Interest from Municipal Bonds.
  • Any rental income.
  • One-half of your Social Security income.

If you are a married couple filing a joint return and your provisional income is over $44,000 you may have up to 85% of your Social Security subject to tax. If you are an individual and your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.

So what can you do today to impact your tax bill of the future?

  1. Consider the Roth IRA or a Roth Conversion. Yes, there’ll likely be taxes to pay today, but, it just may be worth another look. When you withdraw from a Roth IRA in retirement, those withdrawals aren’t increasing your taxable income. With the Roth 401k you pay tax prior to making contributions (post-tax contributions). So, when you take withdrawals during retirement, they will be free of tax on both the contributions and the growth on your money, similar to a Roth IRA.
  2. And, consider how you’ll reduce expenses during retirement. If you need less to live on, you’ll have the ability to remove less from sources like Traditional IRAs and 401ks. When you withdraw or distribute funds from these sources,  your withdrawal is likely to be included in your taxable income.
  3. Plan to have your mortgage paid off (one of the biggest expenses) before you retire. This can help to reduce your tax bill in the future and potentially your income needs with one less bill to pay.
  4. Consider whether or not making “Back Door” contributions to a Roth IRA is a viable option for you. This simple strategy has the potential to provide you with significant tax savings down the road.

Planning today for tomorrow’s potential tax burden is important.

Once you understand some strategies available to help you implement your plan, you’ll have the knowledge to more successfully manage for taxes in retirement.

Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.

Source: Wolters Kluwer CCH.com, The Power of Zero, David McKnight, www.ssa.gov/planners/taxes , Ed Slott & Company, LLC – irahelp.com,

Lenity Financial, Inc.-Should You Invest in a Roth or Traditional IRA?