Minimizing Taxes in Retirement

How do you best minimize taxes in retirement? I talk about this a great deal in our Dollars & Sense segments. When we are retired and drawing income we have to be very mindful of our income tax brackets. If you are in a 10% or 15% tax bracket, your tax bracket for long-term capital gains and qualified dividends is 0%. People sometimes forget that. If you can keep your tax bracket at 15% or lower, even temporarily, this can help minimize taxes.

So if you’re in your 60s and you’ve got big retirement account balances; when you turn 70 ½, you may not ever live in a 15% tax bracket again. You will be required to take required minimum distributions from your IRA accounts. The 25% tax bracket for married couples kicks in around $74,000 of taxable income, which is on page two, after deductions. Up until then you’re in the 15% bracket or even 10%.

So if you’re in your 60s and you’ve got both retirement funds and non-retirement funds to draw from; it might be more beneficial to pull from your non-retirement accounts. If you go down to the bank and pull a dollar out, you do not have to report that dollar on your income tax return because you have already paid the tax. If you draw from investments that have already been taxed, you do not have nearly the same tax ramification. If you pull from investments in your IRAs and 401(k)s that have not been taxed, every dollar shows up on your tax return. Most, if not all of it, is taxed as ordinary income.

We have a real opportunity in our 60s to keep our taxes very, very low. When we talk about Social Security maximization strategies and getting the most out of Social Security, there is a lot of benefits, especially to the higher earning spouse waiting to age 70 because of that 8% per year increase and benefits from 66 to 70. The additional benefit to that is potentially keeping taxable income off of the tax return.

I’ve met people that have several million dollars in investments that earned a very healthy six-figure income; and in their 60s there are in a 0% tax bracket because they are not drawing Social Security. They are living off investments that have already been taxed. They are letting their IRAs and 401(k)s grow. Now, they do have to pay the Piper eventually, but there’s a lot of opportunities in your 60s. Minimizing taxes is a crucial part of a long-term financial plan.